UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
For the transition period from ____________ to ____________
Commission File Number: 001-15373
ENTERPRISE FINANCIAL SERVICES CORP
(Exact name of registrant as specified in its charter)
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec Avenue, Clayton, MO 63105
Telephone: (314) 725-5500
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
(Title of each class)
EFSC
(Trading Symbol)
Nasdaq Global Select Market
(Name of each exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant was approximately $740,426,000 based on the closing price of the common stock
of $31.12 as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2020) as reported by the Nasdaq Global Select Market.
As of February 17, 2021, the Registrant had 31,225,229 shares of outstanding common stock.
Portions of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 are incorporated by reference into Item 7 of this Annual Report on Form 10-K. Additionally, the
information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference to the Registrant’s Definitive Proxy Statement for its 2021
Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
DOCUMENTS INCORPORATED BY REFERENCE
ENTERPRISE FINANCIAL SERVICES CORP
2020 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners, and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Page
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PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Signatures
Glossary of Acronyms, Abbreviations and Entities
The acronyms and abbreviations identified below are used in various sections of this Form 10-K, including “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” in Item 7 and the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements in Item 8 of this Form 10-K.
ACL
ARRC
ASC
ASU
Bank
Board
BOLI
C&I
Allowance for Credit Losses
Alternative Reference Rates Committee
Accounting Standards Codification
Accounting Standards Update
Enterprise Bank & Trust
Enterprise Financial Services Corp board of directors
Bank-Owned Life Insurance
Commercial and Industrial
FDIC
Federal Reserve
FHLB
GAAP
JCB
LANB
LIBOR
MD&A
CCB
CDFI
CECL
CET1
CFPB
Company
CRE
Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act of
Capital Conservation Buffer
Community Development Financial Institution
Current Expected Credit Loss
Common Equity Tier 1 Capital
Consumer Financial Protection Bureau
Enterprise Financial Services Corp and Subsidiaries
Commercial Real Estate
EFSC
Enterprise
FASB
2010
Enterprise Financial Services Corp
Enterprise Financial Services Corp and Subsidiaries
Financial Accounting Standards Board
OCC
PCD
PCI
PPP
PPPLF
SBA
SBIC
Seacoast
SEC
Trinity
Federal Deposit Insurance Corporation
Federal Reserve Board
Federal Home Loan Bank
Generally Accepted Accounting Principles
Jefferson County Bancshares, Inc.
Los Alamos National Bank
London Interbank Offered Rate
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Office of the Comptroller of the Currency
Purchased Credit Deteriorated
Purchased Credit Impaired
Paycheck Protection Program
Paycheck Protection Program Liquidity Facility
U.S. Small Business Administration
Small Business Investment Company
Seacoast Commerce Banc Holdings
Securities and Exchange Commission
Trinity Capital Corporation
PART 1
ITEM 1: BUSINESS
Forward-Looking Information
Some of the information in this Annual Report on Form 10-K may contain “forward-looking statements” within the meaning of and intended
to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and by Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements typically are
identified with use of terms such as “may,” “might,” “will, “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“predict,” “potential,” “could,” “continue” and the negative of these terms and similar words, although some forward-looking statements
may be expressed differently. Forward-looking statements also include, but are not limited to, statements regarding plans, objectives,
expectations or consequences of announced transactions, known trends, and statements about future performance, operations, products and
services. The ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The COVID-19 pandemic is
adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on
our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and
economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could
adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and
further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in
response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences
include, but are not limited to: the ability to efficiently integrate acquisitions, including the Seacoast acquisition, into our operations, retain
the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing
impaired loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with
rapid increases or decreases in prevailing interest rates; consolidation within the banking industry; competition from banks and other
financial institutions; the ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state
regulation; changes in regulatory requirements; changes in accounting regulation or standards applicable to banks, including ASU 2016-13
(Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as the Current Expected Credit Loss
(“CECL”) model, which we adopted on January 1, 2020 and which changed how we estimate credit losses and may increase the required
level of our allowance for credit losses in future periods; uncertainty regarding the future of LIBOR; natural disasters; war or terrorist
activities, or pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in
which we operate; and other risks discussed under the caption “Risk Factors” in Item 1A of this Annual Report on Form 10-K, all of which
could cause actual results to differ from those set forth in the forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis and expectations
only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not
intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result
of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to
predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with the Securities and Exchange
Commission which are available on the Company’s website at www.enterprisebank.com under “Investor Relations.”
General Development and Description of Our Business
Enterprise Financial Services Corp (“we,” “us,” or “our”), a Delaware corporation, is a financial holding company headquartered in Clayton,
Missouri incorporated in December 1994. We are the holding company for Enterprise Bank & Trust, a full-service financial institution
offering banking and wealth management services to individuals and corporate customers primarily located in Arizona, California, Kansas,
Missouri, Nevada, and New Mexico. Our
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executive offices are located at 150 North Meramec Avenue, Clayton, Missouri 63105, and our telephone number is (314) 725-5500.
Our stated mission is “Guiding people to a lifetime of financial success.” We have established an accompanying corporate vision, “To be a
company where our associates are proud to work, that delivers ease of navigation to our customers and value to our investors, while helping
our communities flourish.” These tenets are fundamental to our business strategies and operations.
Our business objective is to generate attractive shareholder returns by providing comprehensive financial services primarily to privately-held
businesses, their owner families, and other success-minded individuals. To achieve these objectives we have developed a business strategy
that leverages a focused and relationship-oriented distribution and sales approach, with an emphasis on niche businesses and growing fee
income, while maintaining prudent credit and interest rate risk management, appropriate supporting technology, and controlled expense
growth. We believe this strategy allows us to maximize organic growth opportunities, which we supplement and enhance through disciplined
strategic growth.
As described in greater detail below, the Company offers a broad range of business and personal banking services, including wealth
management services provided through Enterprise Trust. Lending services include C&I, CRE, real estate construction and development,
residential real estate, SBA, consumer and tax credit-related loan products. A wide variety of deposit products and a complete suite of
treasury management and international trade services, along with our tax credit brokerage activities, complement our lending capabilities.
Building long-term client relationships – Our growth strategy is first and foremost client relationship driven. We continuously seek to add
clients who fit our target market of businesses, business owners, professionals, and associated relationships. Those relationships are
maintained, cultivated, and expanded over time by trained, experienced banking officers and other professionals. We fund loan growth
primarily with core deposits from our business and professional clients in addition to consumers in our branch market areas. This is
supplemented by borrowing or other deposit sources, including advances from the FHLB, and brokered certificates of deposits.
Specialized lending and product niches – We have focused our lending activities in specialty markets where we believe our expertise and
experience as a commercial lender provides advantages over other competitors. In addition, we have developed expertise in certain product
niches. These specialty niche activities focus on the following areas:
•
Sponsor Finance. We support mid-market company mergers and acquisitions in many domestic markets. We market directly to targeted
private equity firms, principally SBICs, and provide primarily senior debt financing to portfolio companies.
• Life Insurance Premium Finance. We specialize in financing whole life insurance premiums utilized in high net worth estate planning,
through relationships with boutique estate planners throughout the United States.
•
•
•
Tax Credit Related Lending. We are a secured lender on affordable housing projects funded through the use of federal and state low
income housing tax credits. In addition, we provide leveraged and other loans on projects funded through the U.S. Department of the
Treasury Community Development Financial Institution (“CDFI”) New Markets Tax Credit Program. In prior years, we were selected to
distribute New Markets Tax Credits, and we continue to participate in the application process, as well as serve as a secured lender to other
allocatees.
Tax Credit Brokerage. We acquire 10-year streams of Missouri state tax credits from affordable housing development funds and sell the
tax credits to clients and other individuals for tax planning purposes. We also have a minority ownership in a partnership that acquires,
invests and sells, state low income housing tax credits. We lend the partnership money with 6 - 12 year terms and receive interest income
and fee income when projects close and when credits are sold.
SBA 7(a). We have a team of experienced bankers in production offices across 13 states that originate loans through the SBA 7(a)
program. These loans are primarily owner-occupied, commercial real estate loans secured by a 1st lien. These loans predominantly have a
75% portion guaranteed by the SBA. By focusing on this specific product type, we have developed an expertise that allows for speed and
reliability of execution.
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Fee income business – We offer a broad range of treasury management products and services that benefit businesses ranging from large
national clients to local merchants. Customized solutions and special product bundles are available to clients of all sizes. In response to ever
increasing needs for data/information security and functional efficiency, we continue to offer robust cash management systems that employ
mobile technology and fraud detection/mitigation services. Enterprise Trust offers a wide range of fiduciary, investment management, and
financial advisory services to facilitate our providing these services. We also offer international banking, and tax credit businesses that
generate fee income.
Use of technology – Our client technology product offerings include, but are not limited to, internet banking, mobile banking, cash
management products, remote deposit capture, positive pay services, fraud detection and prevention, automated payables, check image, and
statement and document imaging. Additional service offerings currently supported by the Bank include controlled disbursements, repurchase
agreements, and sweep investment accounts. Our cash management suite of products blends technology and personal service, which we
believe often creates a competitive advantage over our competition. Technology products are also extensively utilized within the organization
by associates in all lines of business including operations and support, customer service, and financial reporting for internal management
purposes and for external compliance.
Maintaining asset quality – We monitor asset quality through formal, ongoing, multiple-level reviews of loans in each market and specialized
lending niche. These reviews are overseen by the Bank’s credit administration department. In addition, the loan portfolio is subject to ongoing
monitoring by a loan review function that reports directly to the Credit Committee of the Bank’s Board of Directors.
Expense management – We manage expenses carefully through detailed budgeting and expense approval processes and measurement of the
“efficiency ratio”. The efficiency ratio is equal to noninterest expense divided by total revenue (net interest income plus noninterest income).
Growth through Acquisitions – Disciplined strategic acquisitions have contributed significantly to the Corporation’s growth and expansion
over the past five years. Most recently, on November 12, 2020, the Company closed its acquisition of 100% of Seacoast and its wholly-
owned subsidiary, Seacoast Commerce Bank. Seacoast operated five full-service retail and commercial banking offices in California and
Nevada, as well as SBA loan production and deposit production offices in Arizona, California, Colorado, Illinois, Indiana, Massachusetts,
Michigan, Nevada, Ohio, Oregon, Texas, Utah, and Washington. Seacoast shareholders received 0.5061 shares of EFSC common stock for
each Seacoast common share and cash in lieu of any fractional shares. In connection with the merger, Enterprise issued approximately
5.0 million shares of EFSC common stock valued at $33.56 per share, which was the closing price of Enterprise common stock on November
12, 2020. The value of the transaction consideration was approximately $169 million. The Seacoast acquisition enhanced the Company’s
commercial and specialty lending verticals, while enhancing the Company’s funding profile with deposit expertise in property management,
homeowners’ associations, and escrow services, and materially expanding the Company’s geographic footprint.
On March 8, 2019, the Company closed its acquisition of 100% of Trinity and its wholly-owned subsidiary, LANB. Trinity operated six full-
service retail and commercial banking offices in Los Alamos, Santa Fe, and Albuquerque, New Mexico. Trinity shareholders received cash
consideration of $1.84 per share of Trinity common stock and 0.1972 shares of EFSC common stock per share of Trinity common stock with
cash in lieu of fractional shares. Aggregate consideration at closing was approximately 4.0 million shares of EFSC common stock and $37.3
million cash paid to Trinity shareholders. Based on EFSC’s closing stock price of $43.07 on March 7, 2019, the overall transaction had a
value of $209.2 million. The Trinity acquisition expanded the Company’s geographic footprint into New Mexico.
Competition
The Company and its subsidiaries operate in highly competitive markets. Our geographic markets are served by multiple large financial and
bank holding companies with substantial capital resources and lending capacity. We face competition not only from other financial holding
companies and commercial banks, but also from credit
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unions, investment managers, insurers, brokerage firms, technology companies, and other providers of financial services and products. Strong
competition for deposit and loan products affects the rates of those products, as well as the terms on which they are offered to customers.
Available Information
Various reports provided to the SEC, including our annual reports, quarterly reports, current reports, proxy statements, and amendments to
such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of
charge on our website at www.enterprisebank.com under the “Investor Relations” link. These reports are made available as soon as
reasonably practicable after they are electronically filed with or furnished to the SEC. Our filings with the SEC are also available on the
SEC’s website at www.sec.gov. All website addresses given in this document are for information only and are not intended to be an active
link or to incorporate any website information into this document.
Supervision and Regulation
The following is a summary description of the relevant laws, rules, and regulations governing banks and financial holding companies. The
description of, and references to, the statutes and regulations below are brief summaries and do not purport to be complete. The descriptions
are qualified in their entirety by reference to the related statutes and regulations.
The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of depositors, the deposit insurance funds and the banking system as a whole, rather than for the
protection of shareholders or creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance
assessment fees, classification of assets and establishment of adequate loan loss reserves for regulatory purposes.
Various legislation is from time to time introduced in Congress and Missouri’s legislature. Such legislation may change applicable statutes
and the operating environment in substantial and unpredictable ways. We cannot determine the ultimate effect that future legislation or
implementing regulations would have upon our financial condition or upon our results of operations or the results of operations of any of our
subsidiaries.
The Dodd-Frank Act, by way of example, contains a comprehensive set of provisions designed to govern the practices and oversight of
financial institutions and other participants in the financial markets. The Dodd-Frank Act made extensive changes in the regulation of
financial institutions and their holding companies. Some of the changes brought about by the Dodd-Frank Act have been modified by the
Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “Regulatory Relief Act”), signed into law on May 24, 2018.
The Dodd-Frank Act has increased the regulatory burden and compliance costs of the Company.
Legislative and Regulatory Actions in Connection with Global Pandemic. On January 31, 2020, the Secretary of Health and Human Services
declared a public health emergency due to the global outbreak of a new strain of coronavirus (COVID-19). On March 13, 2020, the President
of the United States proclaimed the COVID-19 as a national emergency, following the World Health Organization’s categorization of the
outbreak as a pandemic. COVID-19 continues to aggressively spread globally, including throughout the United States. The pandemic and
resulting travel bans, closure of non-essential businesses, social distancing measures and government responses across the country have had a
profound impact on the global economy, financial markets and how business has been conducted across all industries and have affected many
of the Company’s customers and clients. To the extent the economic impacts of the pandemic continue for a prolonged period and conditions
stagnate or worsen, our provision for credit losses, noninterest income, and profitability may be adversely affected.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act contains
provisions to assist individuals and businesses, including the SBA’s Paycheck Protection Program. The PPP provided $349 billion in
guaranteed loans that are forgivable if certain requirements are met. On April 24, 2020 and December 27, 2020 an additional $310 billion and
$284 billion, respectively, was added to the PPP. The CARES Act also provides certain temporary regulatory relief for financial institutions.
The act permits
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financial institutions to temporarily suspend any determination of a loan modified as a result of the effects of the COVID-19 pandemic as
being a troubled debt restructuring (“TDR”), including impairment for accounting purposes. We elected to apply the CARES Act relief to
certain loan modifications that relate primarily to short-term payment deferrals and have not classified such modifications as TDRs.
The CARES Act included a provision that allowed depository institutions the option to defer adoption of the CECL standard to the earlier of
(1) the end of the COVID-19 national emergency or (2) December 31, 2020. The Company did not elect the deferral option.
The CARES Act grants potential tax relief and liquidity to businesses, including corporate tax provisions that: temporarily allow for the
carryback of net operating losses and remove limitations on the use of loss carryforwards, increase interest expense deduction limitations, and
allow accelerated depreciation deductions on certain asset improvements.
Financial Holding Company
The Company is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). As a
financial holding company, the Company is subject to regulation and examination by the Federal Reserve, and is required to file periodic
reports of its operations and such additional information as the Federal Reserve may require. In order to remain a financial holding company,
the Company must continue to be considered well-managed and well-capitalized by the Federal Reserve, and the Bank must continue to be
considered well-managed and well-capitalized by the FDIC, and have at least a “satisfactory” rating under the Community Reinvestment Act.
See “Liquidity and Capital Resources” in the Management Discussion and Analysis for more information on our capital adequacy, and “Bank
Subsidiary - Community Reinvestment Act” below for more information on the Community Reinvestment Act.
Stock Repurchase Plans: From time to time the Company may engage in stock repurchases. The Federal Reserve requires that bank and
financial holding companies, where certain conditions are triggered, provide prior notice to, consult with, and in certain circumstances seek
the approval of, the Federal Reserve or reserve bank staff prior to implementing a stock repurchase plan. In addition to the formal guidance,
the Federal Reserve appears to have adopted an informal policy of requiring bank and financial holding companies to seek a safety and
soundness “non-objection” from the appropriate regulatory staff prior to implementing a stock repurchase plan, regardless of the financial or
capital position of the holding company. In some cases, examiners following this informal policy have required the holding company to
produce additional information and materials for review.
Acquisitions: With certain limited exceptions, the BHCA requires every financial holding company or bank holding company to obtain the
prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, it would own or control more than 5% of the voting shares of such bank
(unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company.
Additionally, the BHCA provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a
monopoly, substantially lessen competition, or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed
transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal
Reserve also is required to consider the financial and managerial resources and future prospects of the bank holding companies and banks
concerned and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources
generally focuses on capital adequacy, which is described below.
Change in Bank Control: Subject to various exceptions, the BHCA and the Change in Bank Control Act, together with related regulations,
require Federal Reserve approval prior to any person or company acquiring “control” of a bank or financial holding company. Control is
conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the Company or controls
a majority of the board of directors. In certain circumstances, control is rebuttably presumed to exist if a person or company acquires 10% or
more, but less
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than 25%, of any class of voting securities of the Company. The regulations provide a procedure for challenging rebuttable presumptions of
control.
Permitted Activities: The BHCA has generally prohibited a bank holding company from engaging in activities other than banking or
managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling
banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank
holding company that qualifies as a financial holding company. Under the regulations implementing the Gramm-Leach-Bliley Act, a financial
holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activities. Those
activities include, among other activities, certain insurance, advisory and securities activities.
Support of Bank Subsidiaries: Under Federal Reserve policy, the Company is expected to act as a source of financial strength for the Bank
and to commit resources to support the Bank. In addition, pursuant to the Dodd-Frank Act, this longstanding policy has been given the force
of law, and additional regulations promulgated by the Federal Reserve to further implement the statute are possible; however, the bank
subsidiary support provisions of the statute are fully effective even absent implementing regulations. As in the past, such financial support
from the Company may be required at times when, without this legal requirement, the Company may not be inclined to provide it.
Capital Adequacy: The Company is also subject to capital requirements applied on a consolidated basis, which are substantially similar to
those required of the Bank (summarized below).
Dividend Restrictions: Under Federal Reserve policies, financial holding companies may pay cash dividends on common stock only out of
income available over the past year if prospective earnings retention is consistent with the organization’s expected future needs and financial
condition and if the organization is not in danger of not meeting its minimum regulatory capital requirements. Federal Reserve policy also
provides that financial holding companies should not maintain a level of cash dividends that undermines the financial holding company’s
ability to serve as a source of strength to its banking subsidiaries.
Bank Subsidiary
The Bank is a Missouri trust company with banking powers and is subject to supervision and regulation by the Missouri Division of Finance.
In addition, as a Federal Reserve non-member bank, it is subject to supervision and regulation by the FDIC. The Bank is a member of the
FHLB of Des Moines.
The Bank is subject to extensive federal and state regulatory oversight. The various regulatory authorities regulate or monitor all areas of the
banking operations, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings,
deposits, mergers, issuance of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe
lending and deposit gathering practices. The Bank must maintain certain capital ratios and is subject to limitations on aggregate investments
in real estate, bank premises, low-income housing projects, and furniture and fixtures. In connection with their supervision and regulation
responsibilities, the Bank is subject to periodic examination by the FDIC and Missouri Division of Finance.
Capital Adequacy: The Bank is required to comply with the FDIC’s capital adequacy standards for insured banks. The FDIC has issued risk-
based capital and leverage capital guidelines for measuring capital adequacy, and all applicable capital standards must be satisfied for the
Bank to be considered in compliance with regulatory capital requirements.
In 2013, the Federal Reserve, FDIC and OCC approved a final rule to establish a new comprehensive regulatory capital framework for all
U.S. banking organizations. This regulatory capital framework, commonly referred to as Basel III, implemented several changes to the U.S.
regulatory capital framework required by the Dodd-Frank Act.
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The Basel III final rule, effective January 1, 2015, established a new CET1 requirement and increased the minimum tier 1 capital requirement
to 6.0%. In addition, all banking organizations must maintain a CCB consisting of CET1 capital in an amount equal to 2.5% of risk-weighted
assets in order to avoid restrictions on their ability to make capital distributions and to pay certain discretionary bonus payments to executive
officers. The CCB effectively increased the minimum CET1 capital, tier 1 capital, and total capital ratios for U.S. banking organizations to
7.0%, 8.5%, and 10.5%, respectively, as of January 1, 2019.
As required by the Basel III final rule, capital instruments such as trust preferred securities and cumulative preferred shares have been phased
out of tier 1 capital for banking organizations that had $15 billion or more in total consolidated assets as of December 31, 2009, and
grandfathered as tier 1 capital such instruments issued by smaller entities prior to May 19, 2010 (provided they do not exceed 25% of tier 1
capital). The Company’s trust preferred securities currently are grandfathered under this provision.
Prompt Corrective Action: The Bank’s capital categories are determined for the purpose of applying the “prompt corrective action” rules
described below and may be taken into consideration by banking regulators in evaluating proposals for expansion or new activities. They are
not necessarily an accurate representation of a bank’s overall financial condition or prospects for other purposes. A failure to meet the capital
guidelines could subject the Bank to a variety of enforcement actions under those rules, including the issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of brokered deposits, and other restrictions on its business. As
described below, the FDIC also can impose other substantial restrictions on banks that fail to meet applicable capital requirements.
Federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC
has established five capital categories (“well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and
“critically undercapitalized”) and is required to take various mandatory supervisory actions, and is authorized to take other discretionary
actions with respect to banks in the three undercapitalized categories. The severity of any such actions taken will depend upon the capital
category in which a bank is placed. Generally, subject to a narrow exception, current federal law requires the FDIC to appoint a receiver or
conservator for a bank that is critically undercapitalized.
The following table summarizes the prompt corrective action categories:
Prompt Corrective Action Category
Well-capitalized
Adequately capitalized
Undercapitalized
Significantly undercapitalized
Critically undercapitalized
Total Risk-Based Capital
10.0%
8.0%
< 8.0%
< 6.0%
Tier 1 Risk-Based
Capital
Common Equity Tier 1 Risk-
Based Capital
Tier 1 Leverage Ratio
8.0%
6.0%
< 6.0%
< 4.0%
6.5%
4.5%
< 4.5%
< 3.0%
5.0%
4.0%
< 4.0%
< 3.0%
Tangible equity / Total assets ≤ 2.0%
A bank that becomes “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” is required to submit an acceptable
capital restoration plan to the FDIC. An “undercapitalized” bank also is generally prohibited from increasing its average total assets, making
acquisitions, establishing new branches, or engaging in any new line of business, except in accordance with an accepted capital restoration
plan or with the approval of the FDIC. Also, the FDIC may treat an “undercapitalized” bank as being “significantly undercapitalized” if it
determines that those actions are necessary to carry out the purpose of the law.
All of the Bank’s capital ratios were at levels that qualify it to be “well-capitalized” for regulatory purposes as of December 31, 2020.
Consumer Financial Protection Bureau: The Dodd-Frank Act centralized responsibility for consumer financial protection including
implementing, examining and enforcing compliance with federal consumer financial laws with the CFPB. Depository institutions with less
than $10 billion in assets, such as our Bank, will be subject to rules
7
promulgated by the CFPB, but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes.
The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to
prohibit unfair, deceptive or abusive acts and practices. In addition, the Dodd-Frank Act enhanced the regulation of mortgage banking and
gave to the CFPB oversight of many of the core laws which regulate the mortgage industry and the authority to implement mortgage
regulations. Any new regulations adopted by the CFPB may significantly impact consumer mortgage lending and servicing.
The Bank is also subject to other laws and regulations intended to protect consumers in transactions with depository institutions, as well as
other laws or regulations affecting customers of financial institutions generally. While the list set forth herein is not exhaustive, these laws
and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement and Procedures Act, the Fair Credit
Reporting Act and the Federal Trade Commission Act, among others. These laws and regulations mandate certain disclosure requirements
and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers.
The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer
relations.
UDAP and UDAAP: Banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or
otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law.
The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act - the primary
federal law that prohibits unfair or deceptive acts or practices and unfair methods of competition in or affecting commerce (“UDAP” or “FTC
Act”). “Unjustified consumer injury” is the principal focus of the FTC Act. Moreover, the UDAP provisions have been expanded under the
Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices” (“UDAAP”), which has been delegated to the CFPB for
supervision. The CFPB has brought a variety of enforcement actions for violations of UDAAP provisions and CFPB guidance continues to
evolve.
Mortgage Reform: The CFPB has adopted final rules implementing minimum standards for the origination of residential mortgages, including
standards regarding a customer’s ability to repay, restricting variable-rate lending by requiring the ability to repay variable-rate loans be
determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject
to provisions for higher cost loans, new disclosures, and certain other revisions. While the Dodd-Frank Act allows borrowers to raise certain
defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB, the Regulatory Relief Act provides
certain presumptions of qualified mortgage status for banks with assets of less than $10 billion, subject to certain documentation and product
issues.
Dividends by the Bank Subsidiary: Under Missouri law, the Bank may pay dividends to the Company only from a portion of its undivided
profits and may not pay dividends if its capital is impaired. As an insured depository institution, federal law prohibits the Bank from making
any capital distributions, including the payment of a cash dividend if it is “undercapitalized” or after making the distribution would become
undercapitalized. If the FDIC believes the Bank is engaged in, or about to engage in, an unsafe or unsound practice, the FDIC may require,
after notice and hearing, that the bank cease and desist from that practice. The FDIC has indicated that paying dividends that deplete a
depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. The FDIC has issued policy
statements that provide that insured banks generally should pay dividends only from their current operating earnings. The Bank’s payment of
dividends also could be affected or limited by other factors, such as events or circumstances which lead the FDIC to require that it maintain
capital in excess of regulatory guidelines.
Transactions with Affiliates and Insiders: The Bank is subject to the provisions of Regulation W promulgated by the Federal Reserve, which
encompasses Sections 23A and 23B of the Federal Reserve Act. Regulation W places limits and conditions on the amount of loans or
extensions of credit to, investments in, or certain other transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of
8
affiliates. Regulation W also prohibits, among other things, an institution from engaging in certain transactions with certain affiliates unless
the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the
time for comparable transactions with nonaffiliated companies. Federal law also places restrictions on the Bank’s ability to extend credit to its
executive officers, directors, principal shareholders and their related interests. These extensions of credit must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties; and
must not involve more than the normal risk of repayment or present other unfavorable features.
Community Reinvestment Act: The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial
institutions within its jurisdiction, the FDIC is required to evaluate the record of the financial institutions in meeting the credit needs of their
local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions.
These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. The Bank has a
satisfactory rating under CRA.
In April 2018, the U.S. Department of Treasury issued a memorandum to the federal banking regulators recommending changes to the CRA’s
regulations to reduce their complexity and associated burden on banks, and in December 2019, the FDIC and the Office of the Comptroller of
the Currency proposed for public comment rules to modernize the agencies' regulations under the CRA. In September 2020, the Federal
Reserve Board released for public comment its proposed rules to modernize CRA regulations. We will continue to evaluate the impact of any
changes to the CRA regulations.
USA PATRIOT Act: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (the “USA PATRIOT Act”) requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish
due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving
foreign individuals and certain foreign banks; and (iii) implement certain due diligence policies, procedures and controls with regard to
correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In
addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law
enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist
acts or money laundering activities.
Commercial Real Estate Lending: The Bank’s lending operations may be subject to enhanced scrutiny by federal banking regulators based on
its concentration of commercial real estate loans. CRE loans generally include land development, construction loans, and loans secured by
multifamily property, and non-farm, nonresidential real property where the primary source of repayment is derived from rental income
associated with the property. On December 6, 2006, the federal banking regulators issued final guidance to remind financial institutions of the
risk posed by CRE lending concentrations. The guidance prescribes the following guidelines for its examiners to help identify institutions that
are potentially exposed to significant CRE risk, including concentrations in certain types of CRE that may warrant greater supervisory
scrutiny: total reported loans for construction, land development, and other land represent 100% or more of the institutions total capital; or
total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s
commercial real estate loan portfolio has increased by 50% or more.
Volcker Rule: On December 10, 2013, the federal regulators adopted final regulations to implement the proprietary trading and private fund
prohibitions of the Volcker Rule under the Dodd-Frank Act. Under the final regulations, banking entities are generally prohibited, subject to
significant exceptions from: (i) short-term proprietary trading as principal in securities and other financial instruments, and (ii) sponsoring or
acquiring or retaining an ownership interest in private equity and hedge funds. Revisions to the Volcker Rule in 2019, that become effective
in 2020, simplifies and streamlines the compliance requirements for banks that do not have significant trading activities. The Regulatory
Relief Act provided an exemption from the above restrictions for banks with less than $10 billion in assets. In 2020, the OCC, Federal
Reserve, FDIC, SEC and Commodity Futures Trading Commission finalized
9
further amendments to the Volcker Rule. The amendments include new exclusions from the Volcker Rule’s general prohibitions on banking
entities investing in and sponsoring private equity funds, hedge funds, and certain other investment vehicles (collectively “covered funds”).
The amendments in the final rule, which became effective on October 1, 2020, clarify and expand permissible banking activities and
relationships under the Volcker Rule.
Governmental Policies
The operations of the Company and its subsidiaries are affected not only by general economic conditions, but also by the policies of various
regulatory authorities. In particular, the Federal Reserve regulates monetary policy and interest rates in order to influence general economic
conditions. These policies have a significant influence on overall growth and distribution of loans, investments and deposits and affect
interest rates charged on loans or paid for deposits. Federal Reserve monetary policies have had a significant effect on the operating results of
all financial institutions in the past and may continue to do so in the future.
Human Capital Management
We pride ourselves in creating an open, diverse, and transparent culture that celebrates teamwork and recognizes associates at all levels. We
expect and encourage participation and collaboration, and understand that we need each other to be successful. We value accountability
because it is essential to our success, and we accept our responsibility to hold ourselves and others accountable for meeting shareholder
commitments and achieving exceptional standards of performance. We also believe in work/life balance for our associates.
Because quality of life is important to the health of our Company and associates, we are committed to creating a culture that emphasizes and
encourages wellness. Our wellness program is designed to help associates avoid illness while improving and maintaining their general health.
Each year, we provide a variety of information and promote health challenges to educate associates on proper diet, exercise, stress
management and prevention strategies. Annual health screenings are provided to all associates at no charge.
Soliciting Feedback. We conduct associate surveys to ensure that we understand what is important to our associates, including their opinions
on a variety of topics. We have made changes as a result of the survey results including the adoption of a volunteer time-off policy, a parental
leave policy and improvements to internal communication processes. Our efforts are being recognized. For the past three years, the Bank was
included in the “Best Banks to Work for” by American Banker magazine for our dedication to employee satisfaction. In 2020, a significant
portion of our associates responded to one or more surveys of our associates.
Staffing Model. The majority of our employees are regular full-time associates. We also employ regular part-time associates and some
seasonal/temporary associates.
Diversity & Inclusion. We believe that diversity of thought and experiences results in better outcomes and empowers our associates to make
more meaningful contributions within our company and communities. We continue to learn and grow, and our current initiatives reflect our
ongoing efforts around a more diverse, inclusive and equitable workplace.
In 2012, we formed a Diversity/Inclusion (DI) Council, designed to help educate and engage associates on a wide variety of inclusion topics
— from ageism to race. In 2020, the DI Council was renamed, refocused and refreshed resulting in the DEI (Diversity, Equity, Inclusion)
Leadership Council. As part of these focused efforts, we elevated the DEI Leadership Council to a formal internal leadership committee. In
addition, we have designed our associate development programs with a view towards helping to create a more inclusive environment by
giving associates of all backgrounds additional opportunities to succeed and contribute. These programs include:
• Career Acceleration Program - This program allows participants to experience a wide range of assignments by rotating through the
various product partners and operational areas of the Company. Upon successful completion of the program, the associate is placed in
a role that aligns with their strengths and talents and helps meet the needs of our organization.
• Gateway to a Banking Career - This program provides training for jobs as tellers and customer service representatives, job interview
practice and job placement assistance. It is a joint effort with two other St.
10
Louis-based financial institutions. Upon successful completion of the program, participants receive a small stipend and are guaranteed
an interview with one of the program sponsors.
• Empower & Enlighten - This program pairs our senior leaders with mid-level women and minority associates in order to foster an
environment of mutual understanding, to remove generational boundaries and implicit biases, and to build the bridges that connect
people to opportunity.
• Business Resource Groups - These groups bring together associates with a shared identity, interest or goal to create community and
opportunities for improvement and engagement.
We track the representation of women and racial/ethnic minorities because we believe that diversity helps us build more effective teams and
improve our client experience, leading to greater success for the Company and our shareholders. Our gender and race data is monitored by the
Board. We are proud of our progress in this area, but we continue to strive to further diversify our workforce and strengthen our culture of
inclusion.
Benefits. We are committed to offering a competitive total compensation package. We regularly compare compensation and benefits with
peer companies and market data, making adjustments as needed to ensure compensation stays competitive. We also offer a wide array of
benefits for our associates and their families including medical, dental and vision benefits as well as life insurance and short-term disability
for all full-time associates.
Focusing on a Safe and Healthy Workplace. We value our associates and are committed to providing a safe and healthy workplace. Our
formal Health & Safety (HS) Program consists of policies, procedures, and guidelines, and mandates all tasks be conducted in a safe and
efficient manner, while complying with local, state and federal health and safety regulations, and special safety concerns. The HS program
encompasses all facilities and operations and addresses on-site emergencies, injuries and illnesses, evacuation procedures, cell phone usage
and general safety rules. Our employees are required to comply with company safety rules and expectations and are required to certify their
understanding and compliance with company rules. In response to the coronavirus pandemic, we created an oversight committee and
established a resource center to provide updates on our action plans, policies, and safety training.
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ITEM 1A: RISK FACTORS
An investment in our common shares is subject to risks inherent to our business. Before making an investment decision, you should carefully
consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this
report. The value of our common shares could decline due to any of these risks, and you could lose all or part of your investment.
Risks Relating to the Pandemic
The global coronavirus (COVID-19) pandemic has led to periods of significant volatility in financial, commodities and other markets and
could harm our business and results of operations.
Given the ongoing and dynamic nature of the coronavirus (COVID-19) pandemic, it is difficult to predict the impact of the pandemic on our
business, and there is no guarantee that our efforts to address or mitigate the adverse impacts of the COVID-19 pandemic will be effective in
the future. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it
continues, could have an adverse impact on our customers and on our business, financial condition and results of operations as well as our
growth strategy.
Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread
of COVID-19 has caused and could continue to cause severe disruptions in the U.S. economy at large, and has resulted and may continue to
result in disruptions to our customers’ businesses, and a decrease in consumer confidence and business generally. In addition, actions by US
federal, state and local governments to address the pandemic, including travel bans, stay-at-home orders and school, business and
entertainment venue closures, have had and may continue to have a significant adverse effect on our customers and the markets in which we
conduct our business. The extent of further impacts resulting from the COVID-19 pandemic and other events beyond our control will depend
on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the
severity of the COVID-19 pandemic and actions taken to contain the COVID-19 or its impact, among others.
Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans as well as declines
in wealth management revenues. The escalation of the pandemic may also negatively impact regional economic conditions for a period of
time, resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and
deposit availability. If the global response to contain COVID-19 escalates or is unsuccessful, we could experience a material adverse effect on
our business, financial condition, results of operations and cash flows.
The Company has implemented restrictions on employee business travel, conversion of in-person meetings to virtual, and a work-from-home
mandate. The Company has also worked with its customers to implement appropriate loan deferral strategies in certain circumstances. These
actions in response to the COVID-19 pandemic, and similar actions by our vendors and business partners, have not materially impaired our
ability to support our employees, conduct our business and serve our customers, but there is no assurance these actions will be sufficient to
successfully mitigate the risks presented by COVID-19 or that our ability to operate will not be materially affected going forward. For
instance, our business operations may be disrupted if key personnel or significant portions of our employees are unable to work effectively,
including because of illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic. Similarly, if
any of our vendors or business partners become unable to continue to provide their products and services, which we rely upon to maintain our
day-to-day operations, our ability to serve our customers could be impacted.
Unpredictable future developments related to or resulting from the COVID-19 pandemic could materially and adversely affect our business
and results of operations.
Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of
the COVID-19 pandemic’s effects on our business, operations, or the global economy as a whole. Any future development will be highly
uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements,
third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to
the pandemic.
12
We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation
precludes any specific prediction as to its ultimate impact on us. However, if the COVID-19 outbreak continues to spread or otherwise results
in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations
and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in
this Annual Report on Form 10-K may be heightened.
Risks Relating to Economic and Market Conditions
An economic downturn could adversely affect our financial condition, results of operations or cash flows.
The U.S. economy experienced a recession during 2020 and unemployment rates remain elevated as a result of the COVID-19 pandemic. A
continuation of those recessionary conditions and/or negative developments in the domestic and international credit markets may significantly
affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. If the
communities in which we operate do not grow, or if prevailing economic conditions locally or nationally are unfavorable, our business may
not succeed. Unpredictable economic conditions may have an adverse effect on the quality of our loan portfolio and our financial
performance. Adverse changes in the economies in our market areas may have a material adverse effect on our financial condition, results of
operations or cash flows. As a community bank, we bear increased risk of unfavorable local economic conditions. Moreover, we cannot give
any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas even if they do
occur.
We face potential risk from changes in governmental monetary policies.
The Company’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government
and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating
results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or
combat a recession. The monetary policies of the Federal Reserve affect the levels of bank loans, investments, and deposits through its control
over the issuance of United States government securities, its regulation of the discount rate applicable to member banks, and its influence
over reserve requirements to which member banks are subject. The Company cannot predict the nature or impact of future changes in
monetary and fiscal policies.
Legal, Regulatory and Tax Risks
Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related
to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results
of operations.
The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses,
organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA
guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020 and was extended in January 2021; however,
because of the short window between the passing of the CARES Act and the initial opening of the PPP, there is some ambiguity in the laws,
rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. For
instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the
PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on
our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if a
determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a
deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under
the guaranty, seek recovery of any loss related to the deficiency from the Company.
SBA lending is an important part of our business since the acquisition of Seacoast. Our SBA lending program is dependent upon the U.S.
federal government, and we face specific risks associated with originating SBA loans.
Our SBA lending program is dependent upon the U.S. federal government. As an approved participant in the SBA Preferred Lender’s
Program (a “Preferred Lender”), we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval
process necessary for lenders that are not Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to
assess, among other things, whether the
13
lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement
actions, including revocation of the Preferred Lender status. If we lose our status as a Preferred Lender, we may lose some or all of our
customers to lenders who are Preferred Lenders, and as a result we could experience a material adverse effect to our financial results. Any
changes to the SBA program, including but not limited to changes to the level of guarantee provided by the federal government on SBA
loans, changes to program-specific rules impacting volume eligibility under the guaranty program, as well as changes to the program amounts
authorized by Congress, may also have a material adverse effect on our business. In addition, any default by the U.S. government on its
obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or sell such loans in
the secondary market, which could materially adversely affect our business, results of operations, and financial condition. When we originate
SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on a loan, we share any loss and
recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant
technical deficiencies in the way the loan was originated, funded, or serviced by us, the SBA may seek recovery of the principal loss related
to the deficiency.
Changes in government regulation and supervision may increase our costs or impact our ability to operate in certain lines of business.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and
judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Banking regulations are
primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, rather than shareholders.
Because our business is highly regulated, the laws, rules, regulations and supervisory guidance and policies applicable to us are subject to
regular modification and change and could result in an adverse impact on our results of operations.
We are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these
laws could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory
lending requirements on financial institutions. The CFPB, the U.S. Department of Justice and other federal agencies are responsible for
enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws
and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on
mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the
ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material
adverse effect on our business, financial condition, results of operations and future prospects.
We are subject to compliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations, and failure to comply with
these laws could lead to a wide variety of sanctions.
The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to
institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports when
appropriate. In addition to other bank regulatory agencies, the federal Financial Crimes Enforcement Network of the Department of the
Treasury is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in
coordinated enforcement efforts with the state and federal banking regulators, as well as the U.S. Department of Justice, CFPB, Drug
Enforcement Administration, and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced
by the Office of Foreign Assets Control of the Department of the Treasury regarding, among other things, the prohibition of transacting
business with, and the need to freeze assets of, certain persons and organizations identified as a threat to the national security, foreign policy
or economy of the United States. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including
fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to
proceed with certain aspects of our business plan, including any acquisition plans. Failure to maintain and implement adequate programs to
combat money laundering and terrorist financing could also have
14
serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results
of operations and future prospects.
If the Company or the Bank incur losses that erode its capital, it may become subject to enhanced regulation or supervisory action.
Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, the Missouri Division
of Finance, the Federal Reserve Board, and the FDIC have the authority to compel or restrict certain actions if the Company’s or the Bank’s
capital should fall below adequate capital standards as a result of future operating losses, or if its bank regulators determine that it has
insufficient capital. Among other matters, the corrective actions include but are not limited to requiring affirmative action to correct any
conditions resulting from any violation or practice; directing an increase in capital and the maintenance of specific minimum capital ratios;
restricting the Bank’s operations; limiting the rate of interest the bank may pay on brokered deposits; restricting the amount of distributions
and dividends and payment of interest on its trust preferred securities; requiring the Bank to enter into informal or formal enforcement orders,
including memoranda of understanding, written agreements and consent or cease and desist orders to take corrective action and enjoin unsafe
and unsound practices; removing officers and directors and assessing civil monetary penalties; and taking possession of and closing and
liquidating the Bank. These actions may limit the ability of the Bank or Company to execute its business plan and thus can lead to an adverse
impact on the results of operations or financial position.
Financial Risks
Our allowance for credit losses may not be adequate to cover actual loan losses.
We maintain an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, that
represents management’s estimate of probable losses within the existing portfolio of loans. The allowance, in the judgment of management, is
sufficient to reserve for estimated credit losses and risks inherent in the loan portfolio. We continue to monitor the adequacy of our loan credit
allowance and may need to increase it if economic conditions deteriorate. In addition, bank regulatory agencies periodically review our
allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based
on judgments that can differ somewhat from those of our own management. In addition, if charge-offs in future periods exceed the allowance
for loan losses (i.e., if the loan allowance is inadequate), we may need additional credit loss provisions to increase the allowance for loan
losses. Additional provisions to increase the allowance for credit losses, should they become necessary, would result in a decrease in net
income and a reduction in capital, and may have a material adverse effect on our financial condition and results of operations.
Increased regulatory oversight, uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may
adversely affect the results of our operations.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the LIBOR, announced that it intends to stop
persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. The announcement indicates that the continuation of
LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will
continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before
or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Efforts in the United States
to identify a set of alternative U.S. dollar reference interest rates include proposals by the ARRC of the Federal Reserve Board and the
Federal Reserve Bank of New York. Uncertainty as to the nature of alternative reference rates and as to potential changes in other reforms to
LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent securities in our portfolio, and may
impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debentures. The
Company has material contracts that are indexed to LIBOR. If LIBOR rates are no longer available, any successor or replacement interest
rates may perform differently and we may incur significant costs to transition both our borrowing arrangements and the loan agreements with
our customers from LIBOR, which may have an adverse effect on our results of operations. The impact of alternatives to LIBOR on the
valuations, pricing and operation of our financial instruments is not yet known.
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Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.
A substantial portion of our income is derived from the differential or “spread” between the interest earned on loans, investment securities,
and other interest-earning assets, and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the
differences in the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates
may not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Our
assets and liabilities may react differently to changes in overall interest rates or conditions. Significant fluctuations in market interest rates
could materially and adversely affect not only our net interest spread, but also our asset quality and loan origination volume, deposits, funding
availability, and/or net income.
We may not be able to maintain our historical rate of growth or profitability, which could have a material adverse effect on our ability to
successfully implement our business strategy.
Successful growth requires that we follow adequate loan underwriting standards, balance loan and deposit growth without increasing interest
rate risk or compressing our net interest margin, maintain adequate capital at all times, produce investment performance results competitive
with our peers and benchmarks, further diversify our revenue sources, meet the expectations of our clients and hire and retain qualified
employees. If we do not manage our growth successfully, then our business, results of operations or financial condition may be adversely
affected.
We may incur impairments to goodwill.
As of December 31, 2020, we had $261 million recorded as goodwill. We evaluate our goodwill for impairment at least annually. Significant
negative industry or economic trends, including the lack of recovery in the market price of our common stock, or reduced future cash flows or
disruptions to our business, could result in impairments to goodwill. Our valuation methodology for assessing impairment requires
management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance.
We operate in competitive environments and projections of future operating results and cash flows may vary significantly from actual results.
If our analysis results in impairment to goodwill, we would be required to record an impairment charge to earnings in our financial statements
during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on our results of
operations and stock price.
Declines in asset values may result in impairment charges and adversely impact the value of our investments and our financial performance
and capital.
We hold an investment portfolio that includes, but is not limited to, government securities and agency mortgage-backed securities. Factors
beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair
value of these securities. These factors include, but are not limited to, rating agency actions in respect to the securities, defaults by the issuer
or with respect to the underlying securities, changes in market interest rates and/or spread, and instability and other factors impacting the
capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized or unrealized losses in future
periods and declines in other comprehensive income (loss), which could have a material adverse effect on our business, results of operations,
financial condition and future prospects. The process for determining whether impairment of a security is other-than-temporary often requires
complex, subjective judgments about whether there has been significant deterioration in the financial condition of the issuer, whether
management has the intent or ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value, the
future financial performance and liquidity of the issuer and any collateral underlying the security and other relevant factors.
We invest in mortgage-backed obligations and such obligations have been, and are likely to continue to be, impacted by market dislocations,
declining home values and prepayment risk, which may lead to volatility in cash flow and market risk and declines in the value of our
investment portfolio.
Our investment portfolio largely consists of mortgage-backed obligations primarily secured by pools of mortgages on single-family
residences. The value of mortgage-backed obligations in our investment portfolio may fluctuate for several reasons, including (i)
delinquencies and defaults on the mortgages underlying such obligations, due in part to high unemployment rates, (ii) falling home prices,
(iii) lack of a liquid market for such obligations, (iv)
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uncertainties in respect of government-sponsored enterprises such as the Federal National Mortgage Association (“Fannie Mae”) or the
Federal Home Loan Mortgage Corporation (“Freddie Mac”), which guarantee such obligations, and (v) the expiration of government stimulus
initiatives. If the value of homes were to materially decline, the fair value of the mortgage-backed obligations in which we invest may also
decline. Any such decline in the fair value of mortgage-backed obligations, or perceived market uncertainty about their fair value, could
adversely affect our financial position and results of operations. In addition, when we acquire a mortgage-backed security, we anticipate that
the underlying mortgages will prepay at a projected rate, thereby generating an expected yield. Prepayment rates generally increase as interest
rates fall and decrease when rates rise, but changes in prepayment rates are difficult to predict. In light of historically low interest rates, many
of our mortgage-backed securities have a higher interest rate than prevailing market rates, resulting in a premium purchase price. In
accordance with applicable accounting standards, we amortize the premium over the expected life of the mortgage-backed security. If the
mortgage loans securing the mortgage-backed security prepay more rapidly than anticipated, we would have to amortize the premium on an
accelerated basis, which would thereby adversely affect our profitability.
Credit and Liquidity Risks
Our loan and deposit portfolios are in certain markets which could result in increased concentration risk.
A majority of our loans are to businesses and individuals in the St. Louis, Kansas City, Phoenix, Los Alamos, Albuquerque, Santa Fe, San
Diego, and Las Vegas metropolitan areas. These loans are funded by deposits in the same metropolitan areas. The regional economic
conditions in areas where we conduct our business have an impact on the demand for our products and services as well as the ability of our
clients to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources. Consequently, a decline in
local economic conditions may adversely affect our earnings.
There are material risks involved in commercial lending that could adversely affect our business.
Our business plan calls for continued efforts to increase our assets invested in commercial loans. Our commercial loans include loans that are
secured by real estate (commercial property, multi-family residential property, 1-4 family residential property, and construction and land).
Commercial loans generally involve a higher degree of credit risk than residential mortgage loans due, in part, to their larger average size and
less marketable collateral. In addition, unlike residential mortgage loans, commercial loans generally depend on the cash flow of the
borrower’s business to service the debt. Adverse economic conditions or other factors affecting our target markets may have a greater adverse
effect on us than on other financial institutions that have a more diversified client base. Increases in non-performing commercial loans could
result in operating losses, impaired liquidity and erosion of our capital, and could have a material adverse effect on our financial condition
and results of operations. Credit market tightening could adversely affect our commercial borrowers through declines in their business
activities and adversely impact their overall liquidity through the diminished availability of other borrowing sources or otherwise.
Our loan portfolio includes loans secured by real estate, which could result in increased credit risk.
A portion of our portfolio is secured by real estate, and thus we face a high degree of risk from a downturn in our real estate markets. If real
estate values would decline in our markets, our ability to recover on defaulted loans for which the primary reliance for repayment is on the
real estate collateral by foreclosing and selling that real estate would then be diminished, and we would be more likely to suffer losses on
defaulted loans.
Additionally, the state-specific foreclosure laws of the jurisdictions in which our real estate collateral is located may hinder our ability to
timely or fully recover on defaulted loans secured by property in certain states. For example, some states in which our collateral is located are
judicial foreclosure states. In judicial foreclosure states, all foreclosures must be processed through the court system. Due to this process, it
may take up to a year or longer to foreclose on real estate collateral located in those states. Our ability to recover on defaulted loans secured
by property in those states may be delayed and our recovery efforts are lengthened due to this process. In addition, other states have anti-
deficiency statutes with regards to certain types of residential mortgage loans. Our ability to recover on defaulted loans secured by residential
mortgages in anti-deficiency statute states may be limited to the fair value of the real estate securing the loan at the time of foreclosure.
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Our commercial and industrial loans and sponsor finance loans are underwritten based primarily on cash flow, profitability and enterprise
value of the client and are not fully covered by the value of tangible assets or collateral of the client. Consequently, if any of these
transactions becomes non-performing, we could experience significant losses.
Cash flow lending involves lending money to a client based primarily on the expected cash flow, profitability and enterprise value of a client,
with the value of any tangible assets as secondary protection. In some cases, these loans may have more leverage than traditional bank debt.
In the case of our senior cash flow loans, we generally take a lien on substantially all of a client’s assets, but the value of those assets is
typically substantially less than the amount of money we advance to the client under a cash flow transaction. In addition, some of our cash
flow loans may be viewed as stretch loans, meaning they may be at leverage multiples that exceed traditional accepted bank lending standards
for senior cash flow loans. Thus, if a cash flow transaction becomes non-performing, our primary recourse to recover some or all of the
principal of our loan or other debt product would be to force the sale of all or part of the company as a going concern. Additionally, we may
obtain equity ownership in a borrower as a means to recover some or all of the principal of our loan. The risks inherent in cash flow lending
include, among other things:
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reduced use of or demand for the client’s products or services and, thus, reduced cash flow of the client to service the loan and other
debt product as well as reduced value of the client as a going concern;
inability of the client to manage working capital, which could result in lower cash flow;
inaccurate or fraudulent reporting of our client’s positions or financial statements; and
our client’s poor management of their business.
Additionally, many of our clients use the proceeds of our cash flow transactions to make acquisitions. Poorly executed or poorly conceived
acquisitions can burden management, systems and the operations of the existing business, causing a decline in both the client’s cash flow and
the value of its business as a going concern. In addition, many acquisitions involve new management teams taking over day-to-day operations
of a business. These new management teams may fail to execute at the same level as the former management team, which could reduce the
cash flow of the client available to service the loan or other debt product, as well as reduce the value of the client as a going concern.
Widespread financial difficulties or downgrades in the financial strength or credit ratings of life insurance providers could lessen the value of
the collateral securing our life insurance premium finance loans and impair our financial condition and liquidity.
One of the specialized products we offer is financing whole life insurance premiums utilized in high net worth estate planning. These loans
are primarily secured by the insurance policies financed by the loans, i.e., the obligations of the life insurance providers under those policies.
Nationally Recognized Statistical Rating Organizations (“NRSROs”) such as Standard & Poor’s, Moody’s and A.M. Best evaluate the life
insurance providers that are the payors on the life insurance policies that we finance. The value of our collateral could be materially impaired
in the event there are widespread financial difficulties among life insurance providers or the NRSROs downgrade the financial strength
ratings or credit ratings of the life insurance providers, indicating the NRSROs’ opinion that the life insurance provider’s ability to meet
policyholder obligations is impaired, or the ability of the life insurance provider to meet the terms of its debt obligations is impaired. The
value of our collateral is also subject to the risk that a life insurance provider could become insolvent. In particular, if one or more large
nationwide life insurance providers were to fail, the value of our portfolio could be significantly negatively impacted. A significant
downgrade in the value of the collateral supporting our premium finance business could impair our ability to create liquidity for this business,
which, in turn could negatively impact our ability to expand.
Our construction and land development loans are based upon estimates of costs and value associated with the completed project. These
estimates may be inaccurate and we may be exposed to more losses on these projects than on other loans.
Construction, land acquisition and development lending involves additional risks because funds are advanced based upon the projected value
of the project, which is inherently uncertain prior to the project’s completion. Because of the uncertainties inherent in estimating construction
costs, as well as the fair value of the completed project and the effects of governmental regulation of real property and the general effects of
the national and local economies, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related
loan-to-value
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ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of
the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay
principal and interest. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the
repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due
to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan or the
related foreclosure, sale and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have
to hold the property for an unspecified period of time. If any of these events occur, our financial condition, results of operations and cash
flows could be materially and adversely affected.
The ability of our borrowers to repay their loans may be adversely affected by an increase in market interest rates which could result in
increased credit losses. These increased credit losses, where the Bank has retained credit exposure, could decrease our assets, net income
and cash available.
The loans we make to our borrowers may bear interest at a variable or floating interest rate. When market interest rates increase, the amount
of revenue borrowers need to service their debt also increases. Some borrowers may be unable to make their debt service payments. As a
result, an increase in market interest rates will increase the risk of loan default. An increase in non-performing loans could result in a net loss
of earnings from these loans, an increase in the provision for loan and covered loan losses, and an increase in loan charge-offs, all of which
could have a material adverse effect on our business, financial condition and results of operations.
We are subject to environmental risks associated with owning real estate or collateral.
When a borrower defaults on a loan secured by real property, the Company may purchase the property in foreclosure or accept a deed to the
property surrendered by the borrower. We may also take over the management of commercial properties whose owners have defaulted on
loans. We may also own and lease premises where branches and other facilities are located. While we have lending, foreclosure and facilities
guidelines intended to exclude properties with an unreasonable risk of contamination, hazardous substances could exist on some of the
properties that the Company may own, manage or occupy. We face the risk that environmental laws could force us to clean up the properties
at the Company’s expense. The cost of cleaning up or paying damages and penalties associated with environmental problems could increase
our operating expenses. It may cost more to clean a property than the property is worth. We could also be liable for pollution generated by a
borrower’s operations if the Company takes a role in managing those operations after a default. The Company may also find it difficult or
impossible to sell these properties.
We may be obligated to indemnify certain counterparties in financing transactions we enter into pursuant to the New Markets Tax Credit
Program.
We participate in and have previously been an “Allocatee” of the New Markets Tax Credit Program of the U.S. Department of the Treasury
Community Development Financial Institutions Fund. Through this program, we provide our allocation to certain projects, which in turn for
an equity investment from an Investor in the project generate federal tax credits to those investors. This equity, coupled with any debt or
equity from the project sponsor is in turn invested in a certified community development entity for a period of at least seven years.
Community development entities must use this capital to make loans to, or other investments in, qualified businesses in low-income
communities in accordance with New Markets Tax Credit Program criteria. Investors receive an overall tax credit equal to 39% of their total
equity investment, credited at a rate of five percent in each of the first three years and six percent in each of the final four years. However,
after the exhaustion of all cure periods and remedies, the entire credit is subject to recapture if the certified community development entity
fails to maintain its certified status, or if substantially all of the equity investment proceeds associated with the tax credits we allocate are no
longer continuously invested in a qualified business that meets the New Markets Tax Credit Program criteria, or if the equity investment is
redeemed prior to the end of the minimum seven-year term. As part of these financing transactions, we as the parent to Enterprise Financial
CDE, LLC (“CDE”), provide customary indemnities to the tax credit investors, which require us to indemnify and hold harmless the investors
in the event a credit recapture event occurs, unless the recapture is a result of action or inaction of the investor. No assurance can be given that
these counterparties will not call upon us to discharge these obligations in the circumstances under which they are owed.
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If this were to occur, the amount we may be required to pay a bank investor could be substantial and could have a material adverse effect on
our results of operations and financial condition.
If we fail to comply with requirements of the federal New Markets Tax Credit program, the U.S. Department of the Treasury Community
Development Financial Institutions Fund could seek any remedies available under its Allocation Agreement with us, and we could suffer
significant reputational harm and be subject to greater scrutiny from banking regulators.
Because we have been designated as an “Allocatee” under the New Markets Tax Credit Program, we are required to provide allocation fund
qualifying projects under the New Markets Tax Credit Program, and we are responsible for monitoring those projects, ensuring their ongoing
compliance with the requirements of the New Markets Tax Credit Program and satisfying the various recordkeeping and reporting
requirements under the New Markets Tax Credit Program. If we default in our obligations under the New Markets Tax Credit Program, the
U.S. Department of the Treasury may revoke our participation in any other CDFI Fund programs, reallocate the new market tax credits that
were originally allocated to us, and take any other remedial actions that it is empowered to take under the Allocation Agreement they have
entered into with us with respect to the New Markets Tax Credit Program, with the full range of such remedies being unknown. If we were to
default under the New Markets Tax Credit Program, we could suffer negative publicity in the communities in which we operate, and we could
face greater scrutiny from federal and state bank regulators, especially with regard to our compliance with the CRA. These developments
could have a material adverse impact on our reputation, business, financial condition, results of operations and liquidity.
Liquidity risk could impair our ability to fund operations and meet debt coverage obligations, and jeopardize our financial condition.
Liquidity is essential to our business. We are a holding company and depend on our subsidiaries for liquidity needs, including debt coverage
requirements. An inability to raise funds through deposits, borrowings, the sale of investment securities and other sources could have a
substantial material adverse effect on our liquidity. Our access to funding sources in amounts that are adequate to finance our activities could
be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our
access to liquidity sources include but are not limited to a decrease in the level of our business activity due to a market downturn, our failure
to remain well-capitalized, or adverse regulatory action against us. Our ability to acquire deposits or to borrow could also be impaired by
factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects
for the financial services industry as a whole.
Our utilization of brokered deposits could adversely affect our liquidity and results of operations.
Since our inception, we have utilized both brokered and non-brokered deposits as a source of funds to support our growing loan demand and
other liquidity needs. As a bank regulatory supervisory matter, reliance upon brokered deposits as a significant source of funding is
discouraged. Brokered deposits may not be as stable as other types of deposits, and, in the future, those depositors may not renew their
deposits when they mature, or we may have to pay a higher rate of interest to keep those deposits or may have to replace them with other
deposits or with funds from other sources. Additionally, if the Bank ceases to be categorized as “well-capitalized” for bank regulatory
purposes, it would not be able to accept, renew or roll over brokered deposits without a waiver from the FDIC. Our inability to maintain or
replace these brokered deposits as they mature could adversely affect our liquidity and results of operations. Further, paying higher interest
rates to maintain or replace these deposits could adversely affect our net interest margin and results of operations.
By engaging in derivative transactions, we are exposed to additional credit and market risk in our banking business.
We use interest rate swaps to help manage our interest rate risk in our banking business from recorded financial assets and liabilities when
they can be demonstrated to effectively hedge a designated asset or liability and the asset or liability exposes us to interest rate risk or risks
inherent in client related derivatives. We may use other derivative financial instruments to help manage other economic risks, such as
liquidity and credit risk, including exposures that arise from business activities that result in the receipt or payment of future known or
uncertain cash amounts, the value of which are determined by interest rates. We also have derivatives that result from a service we provide to
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certain qualifying clients approved through our credit process, and therefore, these derivatives are not used to manage interest rate risk in our
assets or liabilities. The Company does not enter into derivative financial instruments for trading purposes. Hedging interest rate risk is a
complex process, requiring sophisticated models and routine monitoring. As a result of interest rate fluctuations, hedged assets and liabilities
will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation will generally be offset by income or
loss on the derivative instruments that are linked to the hedged assets and liabilities. By engaging in derivative transactions, we are exposed to
credit and market risk. If the counterparty fails to perform, credit risk exists to the extent of the fair value gain in the derivative. Market risk
exists to the extent that interest rates change in ways that are significantly different from what we expected when we entered into the
derivative transaction. The existence of credit and market risk associated with our derivative instruments could adversely affect our net
interest income and, therefore, could have a material adverse effect on our business, financial condition, results of operations and future
prospects.
Competitive and Reputational Risks
We face significant competition.
The financial services industry, including but not limited to, commercial banking, mortgage banking, consumer lending, and home equity
lending, is highly competitive, and we encounter strong competition for deposits, loans, and other financial services in all of our market areas
in each of our lines of business. Our principal competitors include other commercial banks, savings banks, savings and loan associations,
mutual funds, money market funds, finance companies, trust companies, technology companies, insurers, credit unions, and mortgage
companies among others. Many of our non-bank competitors are not subject to the same degree of regulation as us and have advantages over
us in providing certain services. Many of our competitors are significantly larger than we are and have greater access to capital and other
resources. Also, our ability to compete effectively in our business is dependent on our ability to adapt successfully to regulatory and
technological changes within the banking and financial services industry, generally. If we are unable to compete effectively, we will lose
market share and our income from loans and other products may diminish.
Our ability to compete successfully depends on a number of factors, including, among other things:
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the ability to develop, maintain, and build upon long-term client relationships based on top quality service and high ethical standards;
the scope, relevance, and pricing of products and services, including technological innovations to those products and services, offered
to meet client needs and demands;
the rate at which we introduce new products and services relative to our competitors;
client satisfaction with our level of service; and/or
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, and could adversely affect our growth and
profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Technology is continually changing and we must effectively implement new innovations in providing services to our customers.
The financial services industry is undergoing rapid technological changes with frequent innovations in technology-driven products and
services. In addition to better serving customers, the effective use of technology increases our efficiency and enables us to reduce costs. Our
future success will depend, in part, upon our ability to address the needs of our customers using innovative methods, processes and
technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in
our operations as we continue to grow and expand our market areas. Many national vendors provide turn-key services to community banks,
such as Internet banking and remote deposit capture, that allow smaller banks to compete with institutions that have substantially greater
resources to invest in technological improvements. We may not be able, however, to effectively implement new technology-driven products
and services or be successful in marketing these products and services to our customers.
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Costs and levels of deposits are affected by competition that could increase our funding costs or liquidity risk.
We rely on bank deposits to be a low cost and stable source of funding. We compete with banks and other financial services companies for
deposits. If our competitors raise the rates they pay on deposits, our funding costs may increase, either because we raise our rates to avoid
losing deposits or because we lose deposits and must rely on more expensive sources of funding. Higher funding costs could reduce our net
interest margin and net interest income and could have a material adverse effect on our business, financial condition and results of operations.
Acquisition Risks
We have engaged in and may continue to engage in expansion through acquisitions, and these acquisitions present a number of risks related
both to the acquisition transactions and to the integration of the acquired businesses.
The acquisition of other financial services companies or assets present risks to the Company in addition to those presented by the nature of
the business acquired. Our earnings, financial condition, and prospects after a merger or acquisition depend in part on our ability to
successfully integrate the operations of the acquired company. We may be unable to integrate operations successfully or to achieve expected
results or cost savings.
Acquiring other banks or businesses involves various risks commonly associated with acquisitions, including, among other things:
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potential exposure to unknown or contingent liabilities of the target company;
exposure to potential asset quality issues of the target company;
difficulty and expense of integrating the operations and personnel of the target company;
potential disruption to our business;
potential diversion of our management’s time and attention;
the possible loss of key employees and clients of the target company;
difficulty in estimating the value of the target company;
payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short-
and long-term;
inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other
projected benefits; and/or
potential changes in banking or tax laws or regulations that may affect the target company.
We periodically evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other
financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may
take place, and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. In addition to the risks noted
above, potential acquisitions may incur additional costs for diligence or break-up fees, even if the transaction is not consummated.
We may be unable to successfully integrate new business lines into our existing operations.
From time to time, we may implement other new lines of business or offer new products or services within existing lines of business. There
can be substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed.
Although we continue to expend substantial managerial, operating and financial resources as our business grows, we may be unable to
successfully continue the integration of new business lines, and price and profitability targets may not prove feasible. External factors such as
compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a
new line of business or a new product or service. Furthermore, any new line of business and new product or service could have a significant
impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and
implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition
and results of operations.
As we expand outside our current markets, we may encounter additional risks that may adversely affect us.
We are headquartered in Missouri, but have branch locations in the Kansas City, Phoenix, and San Diego metropolitan areas, as well as
Northern New Mexico and Nevada. Over time, we may acquire or open locations in
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other parts of the United States as well. In the course of these expansion activities, we may encounter significant risks, including unfamiliarity
with the characteristics and business dynamics of new markets, increased marketing and administrative expenses and operational difficulties
arising from our efforts to attract business in new markets, manage operations in noncontiguous geographic markets, comply with local laws
and regulations and effectively and consistently manage personnel and business outside of the State of Missouri. If we are unable to manage
these risks, our operations may be materially and adversely affected.
Technology and Cybersecurity Risks
A failure in or breach, or the inability to recognize a potential breach of our operational or security systems, or those of our third party
service providers, including as a result of cyber-attacks, could disrupt our business, result in unintentional disclosure or misuse of
confidential or proprietary information, damage our reputation, increase our costs and adversely impact our earnings.
As a financial institution, our operations rely heavily on the secure processing, storage and transmission of confidential and other information
on our computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in
failures or disruptions in our internet banking system, treasury management products, check and document imaging, remote deposit capture
systems, general ledger, and other systems. The security and integrity of our systems could be threatened by a variety of interruptions or
information security breaches, including those caused by computer hacking, cyber-attacks, electronic fraudulent activity or attempted theft of
financial assets. We cannot assure any such failures, interruption or security breaches will not occur, or if they do occur, that they will be
adequately addressed. While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue
to evolve. We may be required to expend significant additional resources in the future to modify and enhance our protective measures.
Additionally, we face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our
business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the
source of an attack on, or breach of, our operational systems. Any failures, interruptions or security breaches in our information systems could
damage our reputation, result in a loss of client business, result in a violation of privacy or other laws, or expose us to civil litigation,
regulatory fines or losses not covered by insurance.
We rely on third-party vendors to provide key components of our business infrastructure.
We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems
technology, including relationship management, mobile banking, general ledger, investment, deposit, loan servicing and loan origination
systems. While we have selected these third-party vendors carefully and perform ongoing monitoring, we do not control their actions. Any
problems caused by these third parties, including as a result of inadequate or interrupted service, could adversely affect our ability to deliver
products and services to our clients and otherwise conduct our business. Financial or operational difficulties of a third-party vendor could also
hurt our operations if those difficulties interfere with the vendor’s ability to serve us, and replacing these third-party vendors could result in
significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations as well as
reputational risk.
Risks Relating to Our Common Stock
The price of our common stock may be volatile or may decline.
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In
addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many
companies. These broad market fluctuations could make it more difficult for you to resell your common stock when you want and at prices
you find attractive.
Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
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actual or anticipated quarterly fluctuations in our operating results and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community;
23
◦
◦
◦
◦
◦
◦
◦
strategic actions by us or our competitors, such as acquisitions or restructurings;
actions by institutional shareholders;
fluctuations in the stock prices and operating results of our competitors;
general market conditions and, in particular, developments related to market conditions for the financial services industry;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings or litigation that involve or affect us; and/or
domestic and international economic factors unrelated to our performance.
The stock market and, in particular, the market for financial institution stocks, has historically experienced significant volatility. As a result,
the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual
and cause significant price variations to occur. The trading price of the shares of our common stock and the value of our other securities will
depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance,
creditworthiness and prospects, future sales of our equity or equity related securities, and other factors identified in this annual report and
other reports by the Company. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain
issuers without regard to those issuers’ underlying financial strength or operating results. A significant decline in our stock price could result
in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation.
The trading volume in our common stock is less than that of other larger financial institutions.
Although our common stock is listed for trading on the Nasdaq Global Select Market, its trading volume may be less than that of other, larger
financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the
presence in the marketplace of willing buyers and sellers of our common stock at any given time, a factor over which we have no control.
During any period of lower trading volume of our common stock, significant sales of shares of our common stock or the expectation of these
sales could cause our common stock price to fall.
An investment in our common stock is not insured and you could lose the value of your entire investment.
An investment in our common stock is not a savings account, deposit or other obligation of our bank subsidiary, any non-bank subsidiary or
any other bank, and such investment is not insured or guaranteed by the FDIC or any other governmental agency. As a result, if you acquire
our common stock, you may lose some or all of your investment.
Our ability to pay dividends is limited by various statutes and regulations and depends primarily on the Bank’s ability to distribute funds to
us and is also limited by various statutes and regulations. The Company depends on payments from the Bank, including dividends,
management fees and payments under tax sharing agreements, for substantially all of the Company’s liquidity requirements. Federal and state
regulations limit the amount of dividends and the amount of payments that the Bank may make to the Company under tax sharing
agreements. In certain circumstances, the Missouri Division of Finance, FDIC, or Federal Reserve Board could restrict or prohibit the Bank
from distributing dividends or making other payments to us. In the event that the Bank was restricted from paying dividends to the Company
or making payments under the tax sharing agreement, the Company may not be able to service its debt, pay its other obligations or pay
dividends on its common stock. If we are unable or determine not to pay dividends on our outstanding equity securities, the market price of
such securities could be materially adversely affected.
There can be no assurance of any future dividends on our common stock.
Holders of our common stock are entitled to receive dividends only when, as and if declared by the Board of Directors. Although we have
historically paid cash dividends on our common stock, we are not required to do so.
Our outstanding debt securities, related to our trust preferred securities, restrict our ability to pay dividends on our capital stock.
We have outstanding subordinated debentures issued to statutory trust subsidiaries, which have issued and sold preferred securities in the
Trusts to investors.
24
If we are unable to make payments on any of our subordinated debentures for more than 20 consecutive quarters, we would be in default
under the governing agreements for such securities and the amounts due under such agreements would be immediately due and payable.
Additionally, if for any interest payment period we do not pay interest in respect of the subordinated debentures (which will be used to make
distributions on the trust preferred securities), or if for any interest payment period we do not pay interest in respect of the subordinated
debentures, or if any other event of default occurs, then we generally will be prohibited from declaring or paying any dividends or other
distributions, or redeeming, purchasing or acquiring, any of our capital securities, including the common stock, during the next succeeding
interest payment period applicable to any of the subordinated debentures, or next succeeding interest payment period, as the case may be.
Moreover, any other financing agreements that we enter into in the future may limit our ability to pay cash dividends on our capital stock,
including the common stock. In the event that our existing or future financing agreements restrict our ability to pay dividends in cash on the
common stock, we may be unable to pay dividends in cash on the common stock unless we can refinance amounts outstanding under those
agreements. In addition, if we are unable or determine not to pay interest on our subordinated debentures, the market price of our common
stock could be materially or adversely affected.
Anti-takeover provisions could negatively impact our shareholders.
Provisions of Delaware law and of our certificate of incorporation, as amended, and bylaws, as well as various provisions of federal and
Missouri state law applicable to bank and bank holding companies, could make it more difficult for a third party to acquire control of us or
have the effect of discouraging a third party from attempting to acquire control of us. We are subject to Section 203 of the Delaware General
Corporation Law, which would make it more difficult for another party to acquire us without the approval of our Board of Directors.
Additionally, our certificate of incorporation, as amended, authorizes our Board of Directors to issue preferred stock which could be issued as
a defensive measure in response to a takeover proposal. In the event of a proposed merger, tender offer or other attempt to gain control of the
Company, our Board of Directors would have the ability to readily issue available shares of preferred stock as a method of discouraging,
delaying or preventing a change in control of the Company. Such issuance could occur regardless of whether our shareholders favorably view
the merger, tender offer or other attempt to gain control of the Company. These and other provisions could make it more difficult for a third
party to acquire us even if an acquisition might be in the best interests of our shareholders. Although we have no present intention to issue any
shares of our authorized preferred stock, there can be no assurance that the Company will not do so in the future.
General Risk Factors
Climate-related Risk
Political and social attention to the issue of climate change has increased. Federal and state legislatures and regulatory agencies continue to
propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. As a financial
institution, it is unclear how future government regulations and shifts in business trends resulting from increased concern about climate
change will affect our operations; however, natural or man-made disasters and severe weather events may cause operational disruptions and
damage to both our properties and properties securing our loans. Losses resulting from these disasters and severe weather events may make it
more difficult for borrowers to timely repay their loans. If these events occur, we may experience a decrease in the value of our loan portfolio
and our revenue, and may incur additional operational expenses, each of which could have a material adverse effect on our financial condition
and results of operations.
25
None.
ITEM 1B: UNRESOLVED STAFF COMMENTS
ITEM 2: PROPERTIES
Our executive offices are located at 150 North Meramec Avenue, Clayton, Missouri, 63105. As of December 31, 2020, we had 19 banking
locations, and three limited service facilities in the St. Louis metropolitan area, seven banking locations in the Kansas City metropolitan area,
two banking locations in the Phoenix metropolitan area, six banking locations in New Mexico, four banking locations in the San Diego
metropolitan area, and one banking location in the Las Vegas metropolitan area. Additionally, the Company has a limited network of SBA
loan production offices and deposit production offices in various states. We own or lease our facilities and believe all of our properties are in
good condition to meet our business needs.
ITEM 3: LEGAL PROCEEDINGS
The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management
believes that there are no such legal proceedings pending or threatened against the Company or its subsidiaries in the ordinary course of
business, directly, indirectly, or in the aggregate that, if determined adversely, would have a material adverse effect on the business,
consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
For more information on our legal proceedings, see “Item 8. Note 14 – Litigation and Other Contingencies” in this report.
Not applicable.
ITEM 4: MINE SAFETY DISCLOSURES
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market for Our Common Stock
The Company’s common stock trades on the Nasdaq Global Select Market under the symbol “EFSC.” As of February 17, 2021, the Company
had 1,480 registered shareholders of common stock. The number of holders of record does not represent the actual number of beneficial
owners of our common stock because securities dealers and others frequently hold shares in “street name” for the benefit of individual owners
who have the right to vote shares.
Dividends
The holders of shares of our common stock are entitled to receive dividends when declared by our Board of Directors out of funds legally
available for the purpose of paying dividends. Our Board of Directors approved the Company’s quarterly dividend of $0.18 per common
share for the first quarter of 2021, payable on March 31, 2021 to shareholders of record as of March 15, 2021. We anticipate continuing a
regular quarterly cash dividend. However, we have no obligation to pay dividends and we may change our dividend policy at any time
without notice to our shareholders.
Our ability to pay dividends is substantially dependent upon the ability of our subsidiaries to pay cash dividends to us. Information on
regulatory restrictions on our ability to pay dividends is set forth in “Part I, Item 1. Business - Supervision and Regulation - Financial Holding
Company - Dividend Restrictions.” The amount of dividends, if any, that may be declared by the Company also depends on many other
factors, including future earnings, bank
26
regulatory capital requirements and business conditions as they affect the Company and its subsidiaries. As a result, no assurance can be
given that dividends will be paid in the future with respect to our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
For more information on our equity compensation plans, see “Item 8. Note 16 – Stockholders’ Equity and Compensation Plans” and “Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this report, which are incorporated
herein by reference.
Recent Sales of Unregistered Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
None.
27
Stock Performance Graph
The following graph compares the cumulative total shareholder return on the Company’s common stock from December 31, 2015 through
December 31, 2020. The graph compares the Company’s common stock with the Nasdaq Composite Index (U.S. companies), and the SNL
Bank $5B-$10B Index. The graph assumes an investment of $100.00 in the Company’s common stock and each index at the respective
closing price on December 31, 2015 and reinvestment of all quarterly dividends. The investment is measured as of each subsequent fiscal
year end. There is no assurance that the Company’s common stock performance will continue in the future with the same or similar results as
shown in the graph.
Index
Enterprise Financial Services Corp
Nasdaq Composite Index
SNL Bank $5B-$10B Index
Period Ending December 31,
2015
2016
2017
2018
2019
2020
$
$
$
100.00 $
100.00 $
100.00 $
153.67 $
108.87 $
143.27 $
163.06 $
141.13 $
142.73 $
137.22 $
137.12 $
129.17 $
178.36 $
187.44 $
160.06 $
132.29
271.64
145.37
*Source: S&P Global Market Intelligence. Used with permission. All rights reserved.
ITEM 6: SELECTED FINANCIAL DATA
Not applicable.
28
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The objective of this section is to provide an overview of the results of operations and financial condition of the Company by focusing on
changes in certain key measures from year to year. It should be read in conjunction with the Consolidated Financial Statements and related
Notes contained in “Item 8. Financial Statements and Supplementary Data,” and other financial data presented elsewhere in this report,
particularly the information regarding the Company’s business operations described in Item 1. A detailed discussion comparing 2019 and
2018 results is incorporated herein by reference to Item 7 of the Company’s 2019 Annual Report on Form 10-K filed on February 22, 2020.
Executive Summary
Our Company offers a broad range of business and personal banking services including wealth management services. Lending services
include commercial and industrial, commercial real estate, real estate construction and development, residential real estate, and other loans. A
wide variety of deposit products and a complete suite of treasury management and international trade services complement our lending
capabilities. Tax-credit brokerage activities consist of the acquisition of Federal and State tax credits and the sale of these tax credits. The
Company’s results of operations are also affected by prevailing economic conditions, competition, government policies and other actions of
regulatory agencies.
The Company closed its acquisition of Seacoast and its wholly-owned subsidiary, Seacoast Commerce Bank, on November 12, 2020.
Seacoast operated five full-service retail and commercial banking offices in California and Nevada as well as SBA loan production offices
and deposit production offices in Arizona, California, Colorado, Illinois, Indiana, Massachusetts, Michigan, Nevada, Ohio, Oregon, Texas,
Utah, and Washington. The Company closed its acquisition of Trinity and its wholly-owned subsidiary, LANB, on March 8, 2019. Trinity
operated six full-service retail and commercial banking offices in Los Alamos, Santa Fe, and Albuquerque, New Mexico. The results of
operations of Seacoast and Trinity are included in our consolidated results in periods after the respective acquisition dates and are excluded
from preceding periods. See “Item 8. Note 2 – Acquisitions” for more information.
The following table summarizes the significant components of the Seacoast and Trinity transactions at the date of acquisition:
($ in thousands)
Loans, net
Securities
Total assets acquired
Deposits
Total liabilities assumed
Consideration paid:
Cash
Common stock
Total consideration paid
Seacoast
November 12, 2020
Trinity
March 8, 2019
1,190,441
$
1,312,037
1,081,006
1,193,595
1,630
167,035
168,665
$
$
684,314
428,096
1,232,539
1,081,187
1,116,377
37,275
171,885
209,160
$
$
$
29
Financial Performance Highlights
Below are highlights of our financial performance for the years ended December 31, 2020, 2019 and 2018.
($ in thousands, except per share data)
EARNINGS
Total interest income
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for loan losses
Total noninterest income
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
1
Return on average assets
Return on average common equity
Return on average tangible common equity
Net interest margin (fully tax equivalent)
Efficiency ratio
1
Core efficiency ratio
Dividend payout ratio
Book value per common share
1
Tangible book value per common share
Average common equity to average assets
Tangible common equity to tangible assets
1
ASSET QUALITY
Net charge-offs
Nonperforming loans
Classified assets
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for loan losses to total loans
Net charge-offs to average loans
$
$
$
$
$
$
Year ended December 31,
2020
2019
2018
$
$
$
$
$
304,779
34,778
270,001
65,398
204,603
54,503
167,159
91,947
17,563
74,384
2.76
2.76
0.90 %
8.24 %
11.23 %
3.56 %
51.51 %
50.96 %
26.61 %
34.57
25.48
10.94 %
8.40 %
$
$
$
$
$
305,134
66,417
238,717
6,372
232,345
49,176
165,485
116,036
23,297
92,739
3.56
3.55
1.35 %
11.66 %
16.08 %
3.80 %
57.48 %
52.36 %
17.87 %
32.67
23.76
11.54 %
8.89 %
237,802
45,897
191,905
6,644
185,261
38,347
119,031
104,577
15,360
89,217
3.86
3.83
1.64 %
15.46 %
19.83 %
3.82 %
51.70 %
52.04 %
12.16 %
26.47
20.95
10.61 %
8.66 %
At or for the year ended December 31,
2019
2018
2020
$
1,907
38,507
123,808
0.53 %
0.45 %
1.89 %
0.03 %
$
6,410
26,425
85,897
0.50 %
0.45 %
0.81 %
0.13 %
5,683
16,745
70,126
0.38 %
0.30 %
1.00 %
0.26 %
1
Non-GAAP measures. A reconciliation has been included in this MD&A section under the caption “Use of Non-GAAP Financial Measures.”
The Company noted the following trends during 2020:
• The Company reported net income of $74.4 million, or $2.76 per diluted share for 2020, compared to $92.7 million, or $3.55 per
diluted share for 2019. An increase in operating revenue (net interest income and
30
noninterest income) of $36.6 million in 2020 was offset by a $59.0 million increase in the provision for credit losses. The increase in
the provision for credit losses was primarily due to the forward-looking CECL methodology and the worsening outlook for forecasted
economic factors.
• Net interest income for 2020 totaled $270.0 million, an increase of $31.3 million, or 13%, compared to $238.7 million for 2019. PPP
interest and fee income totaled $19.6 million in 2020. The Seacoast acquisition added $8.0 million and the Company benefited from a
full year of Trinity operations in 2020 compared to a partial year in 2019.
• Net interest margin decreased 24 basis points to 3.56% during 2020, compared to 3.80% in 2019. The decrease was primarily due to a
decline in interest rates during 2020 that reduced the earning asset yield to 4.02% from 4.85%, coupled with the shift in 2020 in
earning assets to lower yielding PPP loans and short-term investments. The one-month and three-month LIBOR rates were 0.14% and
0.24%, respectively, at December 31, 2020, compared to 1.76% and 1.97%, respectively, at December 31, 2019. At December 31,
2020, the Company had $2.5 billion in loans indexed to LIBOR.
• Noninterest income increased $5.3 million, or 11%, to $54.5 million in 2020 compared to $49.2 million in 2019. This improvement
was primarily due to a $2.3 million increase in mortgage revenue on higher volumes and a $2.5 million increase in income from
community development investments.
• Noninterest expenses totaled $167.2 million for 2020, an increase of $1.7 million, or 1%, compared to 2019. The operations of
Seacoast added $6.0 million of noninterest expense in 2020, in addition to $4.2 million of merger-related expenses. The Company
also incurred a full year of Trinity operating expenses in 2020, compared to a partial year in 2019. These increases were offset by a
reduction in the Trinity merger expenses of $18.0 million in 2019. The Company’s efficiency ratio was 51.5% in 2020, compared to
57.5% for the prior year. The decrease in 2020 was primarily due to the merger-related expenses. The Company’s core efficiency
ratio was 51.0% in 2020, compared to 52.4% for the prior year.
1
• The Company’s effective tax rate was 19.1% for the year ended December 31, 2020 compared to 20.1% in 2019. The lower rate in
2020 primarily resulted from increased benefits from tax exempt income.
1
Non-GAAP measures. A reconciliation has been included in this MD&A section under the caption “Use of Non-GAAP Financial Measures.”
2020 Significant Transactions
During 2020, we announced the following significant transactions:
• On November 12, 2020, the Company announced the completion of its acquisition of Seacoast which was merged with and into the
Company, and Seacoast Commerce Bank, Seacoast’s wholly-owned subsidiary, merged with and into the Bank. Aggregate
consideration at closing was 5.0 million shares of Company common stock to Seacoast shareholders. The overall transaction had a
value of $169 million.
• Assisted new and existing customers with navigating and accessing PPP loans through the approval of approximately 3,900 loans
totaling $859 million.
•
In May 2020, the Company issued $63.3 million of 5.75% fixed-to-floating rate subordinated notes due in 2030. The notes are
callable beginning in 2025 and are included in tier 2 capital.
• The Company repurchased 456,251 of its common shares at a weighted-average share price of $33.64. At December 31, 2020, there
were 95,907 shares remaining to be purchased under its existing share repurchase plan.
• Dividends paid in 2020 of $0.72 per share increased $0.10 per share, or 16%, compared to $0.62 per share in 2019.
31
2019 Significant Transactions
During 2019, we announced the following significant transactions:
• On March 8, 2019, the Company announced the completion of its acquisition of Trinity which was merged with and into the
Company, and LANB, Trinity’s wholly-owned subsidiary, merged with and into the Bank. Aggregate consideration at closing was
4.0 million shares of Company common stock and $37.3 million cash paid to Trinity shareholders. The overall transaction had a value
of $209.2 million.
• The Company repurchased 396,737 of its common shares at a weighted-average share price of $39.13, pursuant to its publicly
announced share repurchase program.
• Dividends paid in 2019 of $0.62 per share increased $0.15 per share, or 32%, compared to $0.47 per share in 2018.
32
RESULTS OF OPERATIONS
Net Interest Income
Average Balance Sheet
The following table presents, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing
liabilities, as well as, the corresponding interest rates earned and paid, all on a tax equivalent basis.
2020
Year ended December 31,
2019
2018
Average
Balance
Interest
Income/Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/Expense
Average
Yield/
Rate
$
$ 6,035,178
36,318
6,071,496
Total loans
4.46 % $ 4,988,985
29,583
4.84
5,018,568
4.46
$
268,012
1,852
269,864
5.37 % $ 4,187,988
34,371
6.26
4,222,359
5.38
$
215,791
1,889
217,680
5.15 %
5.50
5.16
1,064,913
30,085
712,227
18,375
($ in thousands)
Assets
Interest-earning assets:
Taxable loans
1
Tax-exempt loans
2
Taxable investments in debt and
equity securities
Non-taxable investments in debt and
equity securities
2
Short-term investments
Total securities and short-term
investments
Total interest-earning assets
1,016,100
350,501
228,760
1,595,361
7,666,857
Noninterest-earning assets
587,057
Total assets $ 8,253,914
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 1,494,364
1,977,826
Money market accounts
589,832
Savings
676,889
Certificates of deposit
4,738,911
179,534
241,635
Total interest-bearing deposits
Subordinated debentures and notes
FHLB advances
Securities sold under agreements to
repurchase
Other borrowings
206,338
32,147
5,398,565
Total interest-bearing liabilities
Noninterest bearing liabilities:
Demand deposits
Other liabilities
1,854,982
97,492
7,351,039
Shareholders' equity
902,875
Total liabilities & shareholders' equity $ 8,253,914
Total liabilities
$
268,914
1,759
270,673
25,524
11,151
620
37,295
307,968
2,101
7,754
279
10,915
21,049
9,885
2,673
542
629
34,778
4,668
2,128
36,881
306,745
7,592
26,267
841
15,156
49,856
7,507
6,668
1,246
1,140
66,417
2.51
3.18
0.27
2.34
4.02
131,161
107,433
1,303,507
6,322,075
572,216
$ 6,894,291
$
0.14 % $ 1,286,641
1,608,349
0.39
489,310
0.05
799,079
1.61
4,183,379
0.44
136,950
5.51
287,474
1.11
0.26
1.96
0.64
169,179
32,392
4,809,374
1,228,832
60,608
6,098,814
795,477
$ 6,894,291
2.83
3.56
1.98
2.83
4.85
40,038
66,771
819,036
5,041,395
395,568
$ 5,436,963
$
0.59 % $
1.63
0.17
1.90
1.19
5.48
2.32
0.74
3.52
1.38
827,155
1,488,238
206,286
653,486
3,175,165
118,129
271,493
170,963
773
3,736,523
1,086,863
36,617
4,860,003
576,960
$ 5,436,963
1,426
1,141
20,942
238,622
3,643
19,361
597
10,168
33,769
5,798
5,556
755
19
45,897
2.58
3.56
1.71
2.56
4.73
0.44 %
1.30
0.29
1.56
1.06
4.91
2.05
0.44
2.46
1.23
3.50 %
3.82
Net interest income
$
273,190
$
240,328
$
192,725
Net interest spread
Net interest margin (tax equivalent)
3.38 %
3.56
3.47 %
3.80
1
Average balances include non-accrual loans. Interest income includes net loan fees of $18.4 million, $4.5 million, and $4.0 million for the years ended December 31, 2020,
2019, and 2018 respectively. The increase in loan fees in 2020 is due to PPP fees of $13.8 million.
2
Non-taxable income is presented on a fully tax-equivalent basis using a 24.7% tax rate. The tax-equivalent adjustments were $3.2 million for the year ended December 31, 2020,
$1.6 million for the year ended December 31, 2019, and $0.8 million for the year ended December 31, 2018.
33
Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest
expense resulting from changes in yield/rates and volume.
($ in thousands)
Interest earned on:
Taxable loans
Tax-exempt loans
Taxable investments in debt and equity securities
Non-taxable investments in debt and equity securities
Short-term investments
3
3
Total interest-earning assets
Interest paid on:
Interest-bearing transaction accounts
Money market accounts
Savings
Certificates of deposit
Subordinated debentures and notes
FHLB advances
Securities sold under agreements to repurchase
Other borrowed funds
Total interest-bearing liabilities
Net interest income
2020 compared to 2019
Increase (decrease) due to
1
Rate
2
Volume
Net
Volume
2019 compared to 2018
Increase (decrease) due to
1
Rate
2
Net
$
$
$
50,916 $
374
(1,334)
7,027
1,228
58,211
1,063 $
4,970
145
(2,142)
2,345
(933)
229
(9)
5,668
52,543 $
(50,014) $
(467)
(3,227)
(544)
(2,736)
(56,988)
(6,554) $
(23,483)
(707)
(2,099)
33
(3,062)
(933)
(502)
(37,307)
(19,681) $
902 $
(93)
(4,561)
6,483
(1,508)
1,223
(5,491) $
(18,513)
(562)
(4,241)
2,378
(3,995)
(704)
(511)
(31,639)
32,862 $
38,793 $
(282)
9,825
3,243
782
52,361
2,450 $
1,659
562
2,515
986
340
(8)
1,110
9,614
42,747 $
13,428 $
245
1,885
(1)
205
15,762
1,499 $
5,247
(318)
2,473
723
772
499
11
10,906
4,856 $
52,221
(37)
11,710
3,242
987
68,123
3,949
6,906
244
4,988
1,709
1,112
491
1,121
20,520
47,603
1
Change in volume multiplied by yield/rate of prior period.
2
Change in yield/rate multiplied by volume of prior period.
3
Nontaxable income is presented on a fully tax equivalent basis using a 24.7% tax rate.
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the
change in each.
Net interest income (on a tax equivalent basis) was $273.2 million for 2020, compared to $240.3 million for 2019, an increase of $32.9
million, or 14%. Total interest income increased $1.2 million and total interest expense decreased $31.6 million. The increase in net interest
income in 2020 was primarily due to higher loan volumes, which benefited from PPP and the Seacoast acquisition, and a decline in the
interest rate on interest-bearing liabilities. A decline in the yield on earning assets offset the benefit provided by higher loan volumes and a
lower cost of funds.
The tax-equivalent net interest margin was 3.56% for 2020, compared to 3.80% for 2019. The primary driver of the decline in net interest
margin from 2019 to 2020 was a decline in short-term rates. The federal funds target rate declined 150 basis points in 2020 and one-month
LIBOR declined 162 basis points. The decline in short-term rates reduced the yield on the Company’s variable-rate loan portfolio, which
represents approximately 60% of total loans. In addition, a shift in the composition of the loan portfolio to lower yielding PPP loans reduced
the net interest margin. The yield on PPP loans was 3.47% on an average balance of $563.6 million in 2020. Excluding PPP, the yield on the
loan portfolio was 4.56%. In response to the decline in interest rates, the Company proactively reduced the cost of certain managed money
market and interest-bearing transaction accounts.
34
Average interest-earning assets increased $1.3 billion, or 21%, to $7.7 billion for the year ended December 31, 2020. The increase was due to
growth in average total loans of $1.1 billion, or 21%, primarily due to PPP loans. Average securities and short-term investments increased
$291.9 million, or 22%. Securities represented 18% of earnings assets in 2020 and 19% in 2019. Short-term securities increased from 2% to
3% of earning assets, primarily due to higher liquidity from deposit growth. Due to volume growth in the balance sheet, interest income on
earning assets increased $58.2 million. Interest income on interest-earnings assets decreased $57.0 million primarily due the decline in
interest rates in 2020 compared to 2019.
Average interest-bearing liabilities increased $589.2 million, or 12% for the year ended December 31, 2020, . The increase in average
interest-bearing liabilities resulted from $555.5 million of growth in interest-bearing deposits primarily due to customer liquidity provided by
PPP loans. While average interest-bearing liabilities increased, interest expense declined $31.6 million due to a 75 basis point decline in the
cost of deposits. The Company issued $63.3 million of subordinated debentures in May 2020 at 5.75% and reduced its use of FHLB
advances. The total cost of interest-bearing liabilities declined 74 basis points, from 1.38% in 2019 to 0.64% in 2020. Volume growth in
deposits and other borrowings used to fund asset growth increased interest expense in 2020 by $5.7 million. Interest expense on interest-
bearing liabilities decreased $37.3 million for the year ended December 31, 2020 due to lower rates.
Noninterest Income
The following table presents a comparative summary of the major components of noninterest income for each of the years in the three-year
period ended December 31, 2020:
($ in thousands)
Service charges on deposit accounts
Wealth management revenue
Card services revenue
Tax credit income
Miscellaneous income
Total noninterest income
2020
Year ended December 31,
2019
2018
2020 vs. 2019
2019 vs. 2018
Change from
$
$
11,717 $
9,732
9,481
6,611
16,962
54,503 $
12,801 $
9,932
9,154
5,393
11,896
49,176 $
11,749 $
8,241
6,686
2,820
8,851
38,347 $
(1,084) $
(200)
327
1,218
5,066
5,327 $
1,052
1,691
2,468
2,573
3,045
10,829
Noninterest income increased $5.3 million, or 11%, in 2020 compared to 2019. This improvement was primarily due to higher income from
tax credit income and other miscellaneous income, primarily mortgage revenue, community development investment fees, swap fees, and
BOLI income. Due to the slowdown in economic activity in 2020 caused by the pandemic, volumes on card and deposit services were down.
Conversely, mortgage revenue was strong as customers took advantage of low, long-term mortgage rates. Similarly, tax credit income
increased in 2020 as activity levels remained strong.
35
Noninterest Expense
The following table presents a comparative summary of the components of noninterest expense:
($ in thousands)
Employee compensation and benefits
Occupancy
Data processing
Professional fees
Merger related expenses
Other expenses
Total noninterest expense
Efficiency ratio
1
Core efficiency ratio
Year ended December 31,
2019
$
$
81,295
12,465
8,242
3,683
17,969
41,831
165,485
$
$
2020
92,288
13,457
9,050
3,940
4,174
44,250
167,159
2018
66,039
9,550
6,321
3,134
1,271
32,716
119,031
Change from
2020 vs. 2019
10,993
992
808
257
(13,795)
2,419
1,674
$
$
2019 vs. 2018
15,256
2,915
1,921
549
16,698
9,115
46,454
$
$
$
$
51.51 %
50.96 %
57.48 %
52.36 %
51.70 %
52.04 %
(5.97)%
(1.40)%
5.78 %
0.32 %
1
A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption “Use of Non-GAAP Financial Measures.”
Noninterest expense increased $1.7 million, or 1%, in 2020 compared to 2019. While total noninterest expense did not materially change
from 2019, there were offsetting changes within the expense categories. The Company recorded $6.0 million of operating expenses from the
acquisition of Seacoast, including $3.0 million in employee compensation and benefits and $2.2 million in other expenses from SBA lending
and customer marketing and support services. Fiscal 2020 was also the first full year of Trinity operations. Employee compensation increased
$11.0 million in 2020 compared to 2019, due to the previously mentioned increases from Seacoast and Trinity, annual merit and cost of living
increases of approximately 3% of base salaries, and higher mortgage commissions commensurate with the increase in revenue. Merger related
expenses of $4.2 million on the Seacoast acquisition were $13.8 million lower than the $18.0 million recorded in 2019 on the Trinity
acquisition. In 2020, the majority of the Company's employees shifted to a virtual work environment. The Company did not experience a
significant change in its operating expense from this development.
The Company expects to continue to invest in revenue producing associates and other infrastructure that supports additional growth.
Income Taxes
The Company’s blended federal and state tax rate is approximately 24.9%. Permanent differences between pre-tax income and taxable
income along with tax planning initiatives reduced the effective income tax rate in 2020 to 19.1% compared to 20.1% in 2019. In addition,
pursuant to the CARES Act, the Company was able to carryback a net operating loss to a prior period with a higher tax rate. This generated a
tax benefit in 2020 of approximately $0.5 million.
36
FINANCIAL CONDITION
Summary Balance Sheet
($ in thousands)
Total cash and cash equivalents
Securities
Total loans
Total assets
Deposits
Total liabilities
Total shareholders’ equity
December 31,
% Increase (Decrease)
2020
2019
$
537,703 $
167,256 $
1,400,039
7,224,935
9,751,571
7,985,389
8,672,596
1,078,975
1,316,483
5,314,337
7,333,791
5,771,023
6,466,606
867,185
2018
196,552
787,048
4,350,001
5,645,662
4,587,985
5,041,858
603,804
2020 vs. 2019
2019 vs. 2018
221.49 %
6.35 %
35.95 %
32.97 %
38.37 %
34.11 %
24.42 %
(14.90)%
67.27 %
22.17 %
29.90 %
25.79 %
28.26 %
43.62 %
Assets
Loans by Type
The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial
portion of the portfolio, including the C&I category, is secured by $4.0 billion of real estate. The ability of the Company’s borrowers to honor
their contractual obligations is partially dependent upon the local economy and its effect on the real estate market.
The following table sets forth the composition of the Company’s loan portfolio by type of loans at the dates indicated:
($ in thousands)
Commercial and industrial
Commercial real estate - investor owned
Commercial real estate - owner occupied
Construction and land development
Residential real estate
Other
Total loans
Commercial and industrial
Commercial real estate - investor owned
Commercial real estate - owner occupied
Construction and land development
Residential real estate
Other
Total loans
2020
3,088,995
1,589,419
1,498,408
546,686
319,179
182,248
7,224,935
$
$
2019
2,361,157
1,299,884
697,437
457,273
366,261
132,325
5,314,337
$
$
2020
2019
$
$
December 31,
2018
2,123,167
867,667
614,167
334,645
305,026
105,329
4,350,001
December 31,
2018
42.8 %
22.0 %
20.7 %
7.6 %
4.4 %
2.5 %
100.0 %
44.4 %
24.5 %
13.1 %
8.6 %
6.9 %
2.5 %
100.0 %
48.8 %
19.9 %
14.1 %
7.7 %
7.0 %
2.5 %
100.0 %
2017
1,921,676
812,162
565,803
308,974
352,093
136,342
4,097,050
$
$
2016
1,636,238
552,969
362,011
198,907
252,552
155,484
3,158,161
$
$
2017
2016
46.9 %
19.8 %
13.8 %
7.5 %
8.6 %
3.4 %
100.0 %
51.8 %
17.4 %
11.6 %
6.3 %
8.0 %
4.9 %
100.0 %
C&I loans are made based on the borrower’s ability to generate cash flows for repayment from income sources, general credit strength,
experience, and character, even though such loans may also be secured by real estate or other assets. The credit risk related to commercial
loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations.
The Company continues to focus on originating high-quality C&I relationships as they typically have variable interest rates and allow for
cross selling opportunities involving other banking products. C&I loan growth also
37
supports our efforts to maintain the Company’s asset sensitive interest rate risk position. Additionally, our specialized products, especially
sponsor finance, life insurance premium financing, and tax credit financing/lending, consist of primarily C&I loans, and have contributed
significantly to the Company’s C&I loan growth. These loans are sourced through relationships developed with wealth and estate planning
firms and private equity funds and are not bound geographically by our markets. As a result, these specialized loan products offer
opportunities to expand and diversify our overall geographic concentration by entering into new markets. For the period ending December 31,
2020, C&I loans increased $727.8 million, or 31%, from 2019 primarily due to PPP loans.
Real estate loans place an emphasis on the estimated cash flows from the operation of the property and/or the underlying collateral value.
• Our commercial real estate loans, including investor-owned and owner-occupied categories, primarily represent multifamily and other
commercial property loans on which the primary source of repayment is income from the property. These loans are principally
underwritten based on the cash flow coverage of the property, the Company’s loan to value guidelines, and generally require either
the limited or full guaranty of principal sponsors of the credit. Commercial real estate loans also represent owner-occupied C&I loans
for which the primary source of repayment is dependent on sources other than the underlying collateral. For the period ending
December 31, 2020, commercial real estate loans increased $1.1 billion, or 55%, from 2019 primarily due to the acquisition of
Seacoast.
• Construction and land development loans relating primarily to residential and commercial properties, represent financing secured by
real estate under development for eventual sale or undeveloped ground. At December 31, 2020, $164.4 million of these loans include
the use of interest reserves and follow standard underwriting guidelines. Construction projects are monitored by the loan officer and a
centralized independent loan disbursement function is employed.
• Residential real estate loans include residential mortgages, which are loans that, due to size or other attributes, do not qualify for
conventional home mortgages available-for-sale in the secondary market, second mortgages and home equity lines. Residential
mortgage loans are usually limited to a maximum of 80% of collateral value at origination.
Other loans represent loans to individuals, loans to state and political subdivisions, loans to nondepository financial institutions, and loans to
purchase or are fully secured by investment securities. Credit risk is managed by thoroughly reviewing the creditworthiness of the borrowers
prior to origination and thereafter.
38
The following table presents a breakdown of loans by NAICS code at December 31, 2020 and 2019:
December 31, 2020
December 31, 2019
1
($ in thousands)
Accomodation and Food Services
Administrative and Support and Waste Management and Remediation Services
Agriculture, Forestry, Fishing and Hunting
Arts, Entertainment, and Recreation
Construction
Educational Services
Finance and Insurance
Health Care and Social Assistance
Information
Management of Companies and Enterprises
Manufacturing
Mining, Quarrying, and Oil and Gas Extraction
Other Services (except Public Administration)
Professional, Scientific, and Technical Services
Public Administration
Real Estate and Rental and Leasing
Retail Trade
Transportation and Warehousing
Utilities
Wholesale Trade
Other
Outstanding
Balance
$
577,026
167,023
207,335
110,422
451,050
53,708
1,057,888
320,556
53,696
54,563
590,652
3,375
509,006
304,701
13,811
1,722,630
398,251
151,273
19,321
360,630
98,018
7,224,935
%
Outstanding
Balance
%
8 % $
2 %
3 %
2 %
6 %
1 %
15 %
4 %
1 %
1 %
8 %
— %
7 %
4 %
— %
24 %
6 %
2 %
— %
5 %
1 %
100 % $
290,357
96,939
143,604
65,243
237,052
45,020
863,908
207,257
34,764
47,499
412,719
10,187
389,972
151,595
14,932
1,534,109
233,587
110,142
13,398
341,025
71,028
5,314,337
6 %
2 %
3 %
1 %
5 %
1 %
16 %
4 %
1 %
1 %
8 %
— %
7 %
3 %
— %
29 %
4 %
2 %
— %
6 %
1 %
100 %
Total Loans
$
1
Includes $109.0 million in animal production and $92.7 million in crop production at December 31, 2020.
The following table presents a breakdown of commercial & industrial loans by size at December 31, 2020.
($ in thousands)
<$2 million
$2-5 million
$5-10 million
>$10 million
Total
Number of Loans
Outstanding Balance
Average Balance
5,659 $
277
85
41
6,062 $
1,020,870 $
858,287
597,944
611,894
3,088,995 $
180
3,099
7,035
14,924
510
The following table presents a breakdown of commercial real estate loans by size at December 31, 2020.
($ in thousands)
<$2 million
$2-5 million
$5-10 million
>$10 million
Total
Number of Loans
Outstanding Balance
Average Balance
2,775 $
289
70
23
3,157 $
1,409,207 $
903,998
454,430
320,192
3,087,827 $
508
3,128
6,492
13,921
978
39
The following table presents a breakdown of construction loans by size at December 31, 2020.
($ in thousands)
<$2 million
$2-5 million
$5-10 million
>$10 million
Total
Number of Loans
Outstanding Balance
Average Balance
572 $
39
18
9
638 $
163,327 $
125,446
126,585
131,328
546,686 $
286
3,217
7,033
14,592
857
The following table presents a breakdown of residential loans by size at December 31, 2020.
($ in thousands)
<$2 million
$2-5 million
$5-10 million
Total
Number of Loans
Outstanding Balance
Average Balance
2,764 $
6
1
2,771 $
295,259 $
17,919
6,001
319,179 $
107
2,987
6,001
115
The following table presents a breakdown of other loans by size at December 31, 2020.
($ in thousands)
<$2 million
$2-5 million
$5-10 million
>$10 million
Total
Number of Loans
Outstanding Balance
Average Balance
2,008 $
15
5
2
2,030 $
86,475 $
41,394
32,468
21,911
182,248 $
43
2,760
6,494
10,955
90
The following table presents a breakdown of total loans by geographic region at December 31, 2020:
($ in thousands)
St. Louis
Kansas City
Arizona
New Mexico
California
Total
$
$
December 31, 2020
2,528,049
809,568
419,738
617,496
264,080
4,638,931
The table above excludes $698.6 million of PPP loans and $1.9 billion of specialty lending at December 31, 2020 and $1.0 billion of specialty
lending at December 31, 2019.
40
The following table illustrates selected specialty lending detail, at December 31, 2020 and 2019:
($ in thousands)
C&I
CRE investor owned
CRE owner occupied
SBA loans
SBA PPP loans
Sponsor finance
Life insurance premium financing
Residential real estate
Construction and land development
Tax credits
Other
Total Loans
December 31,
2020
1,103,060 $
1,420,905
825,846
895,930
698,645
396,487
534,092
318,091
474,399
382,602
174,878
7,224,935 $
2019
1,179,169 $
1,287,633
713,563
19,249
—
428,896
472,822
366,024
428,681
294,210
124,090
5,314,337 $
$
$
Change
% Change
Seacoast Acquired Loans
at 12/31/20
(76,109)
133,272
112,283
876,681
698,645
(32,409)
61,270
(47,933)
45,718
88,392
50,788
1,910,598
(6.5)% $
10.4 %
15.7 %
4,554.4 %
NM
(7.6)%
13.0 %
(13.1)%
10.7 %
30.0 %
40.9 %
36.0 % $
16,079
107,449
98,134
874,578
85,729
—
—
9,138
32,535
—
764
1,224,406
Certain prior period amounts have been reclassified among the categories to conform to the current period presentation.
The sponsor finance portfolio is primarily comprised of loans in the manufacturing, and wholesale trade sectors. It includes mid-market
company mergers and acquisitions, targeted private equity firms, principally SBICs, and senior debt financing to portfolio companies.
The life insurance premium financing category specializes in financing whole life insurance premiums utilized in high net worth estate
planning, through relationships with boutique estate planners throughout the United States.
The tax credit portfolio includes tax credit-related lending on affordable housing projects funded through the use of
federal and state low income housing tax credits. In addition, we provide leveraged and other loans on projects funded through the U.S.
Department of the Treasury Community Development Financial Institution (“CDFI”) New Markets Tax Credit Program. This portfolio also
includes tax credit brokerage through 10-year streams of Missouri state tax credits from affordable housing development funds. The tax
credits are sold to clients and other individuals for tax planning purposes.
SBA 7(a) loans are primarily owner-occupied, commercial real estate loans secured by a 1st lien. These loans predominantly have a 75%
portion guaranteed by the SBA.
SBA PPP loans originated in 2020 in response to the COVID-19 pandemic and are guaranteed by the SBA. The loans may be forgivable by
the SBA if certain requirements are met.
Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers
engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2020, no
significant concentrations exceeding 10% of total loans existed in the Company’s loan portfolio, except as described above.
41
The following table presents the maturity distribution of loans at December 31, 2020 categorized by fixed or variable interest rates, net of
unearned loan fees:
($ in thousands)
Fixed Rate Loans
Commercial and industrial
Real estate:
Commercial
Construction and land development
Residential
Other
Total
Variable Rate Loans
Commercial and industrial
Real estate:
Commercial
Construction and land development
Residential
Other
Total
Total Loans
Commercial and industrial
Real estate:
Commercial
Construction and land development
Residential
Other
Total
Due in One
Year or Less
After One
Through Five
Years
After
Five Years
Total
Percent of
Total Loans
$
$
$
$
$
$
65,522 $
964,958 $
149,438 $
1,179,918
233,582
56,428
24,523
947
381,002 $
925,518
137,447
57,068
13,520
2,098,511 $
300,966
4,718
42,283
101,409
598,814 $
1,460,066
198,593
123,874
115,876
3,078,327
1,827,245 $
76,348 $
5,484 $
1,909,077
1,379,525
338,900
147,226
61,416
3,754,312 $
238,107
8,961
43,122
4,956
371,494 $
10,129
232
4,957
—
20,802 $
1,627,761
348,093
195,305
66,372
4,146,608
1,892,767 $
1,041,306 $
154,922 $
3,088,995
1,613,107
395,328
171,749
62,363
4,135,314 $
1,163,625
146,408
100,190
18,476
2,470,005 $
311,095
4,950
47,240
101,409
619,616 $
3,087,827
546,686
319,179
182,248
7,224,935
16 %
20 %
3 %
2 %
2 %
43 %
26 %
23 %
5 %
3 %
1 %
58 %
43 %
43 %
8 %
4 %
2 %
100 %
Fixed rate loans comprise 43% of the total loan portfolio at December 31, 2020, and 58% of the Company’s loans are variable-rate loans,
most of which are based on the prime rate or LIBOR. Most loan originations have one-to three-year maturities. Management monitors this
mix as part of its interest rate risk management. See “Interest Rate Risk” of this MD&A section.
Of the $1.6 billion of commercial real estate loans maturing in one year or less, $469 million, or 29%, represent loans secured by non-owner
occupied commercial properties.
42
Provision and Allowance for Loan Losses
The adoption of CECL on January 1, 2020 increased the ACL on loans by $28.4 million, or 65%, and the allowance for unfunded
commitments by $2.4 million. These increases were offset in retained earnings and did not impact the consolidated statement of operations.
The following table summarizes changes in the ACL on loans arising from CECL adoption; additions to the allowance from acquired PCD
loans, additions charged to expense, as well as loan charge-offs and recoveries by loan category.
($ in thousands)
Allowance, at beginning of period
CECL adoption
PCD loans immediately charged-off
Allowance, at beginning of period, adjusted for adoption of CECL
Initial allowance on acquired PCD loans
Provision for credit losses
Charge-offs:
Commercial and industrial
Real estate:
Commercial
Construction and land development
Residential
Other
Recoveries:
Total charge-offs
Commercial and industrial
Real estate:
Commercial
Construction and land development
Residential
Other
Total recoveries
Net charge-offs
Net charge-offs on PCI loans
Allowance, at end of period
2020
2019
December 31,
2018
2017
2016
43,288 $
28,387
(1,680)
69,995 $
3,524
63,379
43,476 $
—
—
43,476 $
—
6,372
42,577 $
—
—
42,577 $
—
6,644
43,409 $
—
—
43,409 $
—
10,130
43,616
—
—
43,616
—
3,605
(5,381)
(6,882)
(6,894)
(9,872)
(2,303)
(528)
(31)
(408)
(391)
(6,739)
1,848
3,197
384
967
116
6,512
(227)
—
136,671 $
(609)
(54)
(667)
(382)
(8,594)
(313)
(56)
(546)
(167)
(7,976)
(207)
(254)
(973)
(201)
(11,507)
(95)
—
(25)
(1,912)
(4,335)
338
1,133
545
674
114
776
661
295
2,184
(6,410)
(150)
43,288 $
112
459
508
80
2,292
(5,684)
(61)
43,476 $
235
101
390
73
1,344
(10,163)
(799)
42,577 $
1,165
934
123
12
2,908
(1,427)
(2,385)
43,409
$
$
$
The following table presents the components of the provision for credit losses:
(in thousands)
Provision for loan losses
Day 2 provision on Seacoast acquired loans
Provision for off-balance sheet commitments
Provision for held-to-maturity securities
Recovery of accrued interest
Provision for credit losses
43
December 31,
2020
2019
$
$
54,822 $
8,557
2,877
147
(1,005)
65,398 $
6,372
—
—
—
—
6,372
The following table is a summary of the allocation of the allowance for loan losses for the five-year period ended December 31, 2020:
($ in thousands)
Commercial and industrial
Real estate:
Commercial
Construction and land
development
Residential
Other
Total allowance
$
2020
2019
December 31,
2018
2017
2016
Allowance
Percent
Allowance
Percent
Allowance
Percent
Allowance
Percent
Allowance
Percent
$
58,812
42.8 % $
27,455
44.4 % $
29,286
48.8 % $
26,706
46.9 % $
27,615
51.8 %
49,074
42.7 %
10,808
37.6 %
8,924
34.1 %
8,553
33.6 %
8,220
29.0 %
21,413
4,585
2,787
136,671
7.6 %
4.4 %
2.5 %
100.0 % $
2,611
1,703
711
43,288
8.6 %
6.9 %
2.5 %
100.0 % $
2,344
2,191
731
43,476
7.7 %
7.0 %
2.4 %
100.0 % $
2,251
4,217
850
42,577
7.5 %
8.6 %
3.4 %
100.0 % $
2,127
4,500
947
43,409
6.3 %
8.0 %
4.9 %
100.0 %
The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL
at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. The Company also
records reversals of interest on nonaccrual loans and interest recoveries directly through the provision of credit losses. CECL requires
economic forecasts to be factored into determining estimated losses. As a result, CECL will typically require a higher level of provision at the
start of an economic downturn. The increase in the provision for credit losses in 2020 was primarily due to a change in economic forecasts
from the end of 2019, which significantly deteriorated in March 2020 due to the COVID-19 pandemic and the resulting slow-down of
business activity. Two of the primary economic loss drivers used in estimating the ACL include the percentage change in GDP and
unemployment. At December 31, 2020, the Company’s forecast of the percentage change in GDP included a range of (2.5)% to 11.9% and
the percentage change in unemployment included a range of 5.6% to 9.8%. The Company utilizes a one-year reasonable and supportable
forecast and a one-year reversion period
As part of the acquisition of Seacoast, we recognized an allowance of $3.5 million on the PCD portfolio. In addition, we recognized $8.6
million on the non-PCD portion of the portfolio.
To the extent the Company does not recognize charge-offs and economic forecasts improve in future periods, the Company could recognize a
reversal of provision for credit losses. Conversely, if economic conditions and the Company’s forecast worsens, the Company could
recognize elevated levels of provision for credit losses. The provision is also reflective of charge-offs in the period.
The allowance for loan losses was 1.89% of total loans at December 31, 2020, compared to 0.81%, and 1.00%, at December 31, 2019 and
2018, respectively. The increase in 2020 compared to 2019 was due to the adoption of CECL and higher provision expense due to the
pandemic, partially offset by the acquisition of Seacoast and PPP loans which include $1.3 billion in government-guaranteed loans with no
allowance.
See “Critical Accounting Policies” of this MD&A section for more information on the allowance for loan losses methodology.
Nonperforming assets
Prior to the adoption of CECL, PCI loans were accounted for in performing pools of loans and were not individually identified as nonaccrual
or classified. Under the CECL accounting model, the Company did not elect to maintain PCI pools for certain loans which are now accounted
for individually and are now included in nonperforming and classified loans. PCI loans are referred to as PCD under CECL.
See “Item 8. Note 1 – Summary of Significant Accounting Policies” for more policy information on impaired loans and other real estate.
44
The following table presents the categories of nonperforming assets, excluding government guaranteed portions, as of the dates indicated:
($ in thousands)
Non-accrual loans
Loans past due 90 days or more and still accruing interest
Restructured loans
Total nonperforming loans
Other real estate
Total nonperforming assets
Total assets
Total loans
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for loan losses to nonperforming loans
$
$
$
2020
2019
$
$
$
34,818
130
3,559
38,507
5,330
43,837
9,751,571
7,224,935
0.53 %
0.45 %
355 %
$
$
$
26,096
250
79
26,425
6,344
32,769
7,333,791
5,314,337
0.50 %
0.45 %
164 %
$
$
$
December 31,
2018
16,520
—
225
16,745
469
17,214
5,645,662
4,350,001
0.38 %
0.30 %
260 %
2017
2016
$
$
$
14,968
—
719
15,687
498
16,185
5,289,225
4,097,050
0.38 %
0.31 %
271 %
12,585
—
2,320
14,905
980
15,885
4,081,328
3,158,161
0.47 %
0.39 %
291 %
Nonperforming loans
Nonperforming loans based on loan type were as follows:
($ in thousands)
Commercial and industrial
Commercial real estate
Residential real estate
Other
Total
December 31, 2020
Number of
loans
December 31, 2019
Number of
loans
$
$
21,770
12,519
4,189
29
38,507
57 %
32 %
11 %
— %
100 %
21
27
3
33
84
$
$
22,578
2,516
1,330
1
26,425
85 %
10 %
5 %
— %
100 %
14
7
10
1
32
The following table summarizes the changes in nonperforming loans:
($ in thousands)
Nonperforming loans, beginning of period
CECL adoption
PCD loans immediately charged off
Nonperforming loans, January 1
Additions to nonaccrual loans
Additions to restructured loans
Charge-offs
Principal reductions
Moved to other real estate
Moved to performing
Loans past due 90 days or more and still accruing interest
Nonperforming loans, end of period
Year ended December 31,
2020
2019
26,425 $
8,462
(1,680)
33,207 $
25,849
3,750
(6,739)
(16,303)
(798)
(361)
(98)
38,507 $
16,745
—
—
16,745
32,214
—
(8,173)
(12,205)
(1,732)
(674)
250
26,425
$
$
$
Nonperforming loans at December 31, 2020 increased $12.1 million, or 46%, when compared to December 31, 2019. The increase in
nonperforming loans during 2020 was primarily from a $9.1 million hotel loan. The Company has a specific reserve of $2.8 million for the
potential collateral shortfall.
45
The Company has implemented several loan programs to assist its customers impacted by the COVID-19 pandemic. These programs include
consumer and business deferral programs and expanded small business lines of credit.
The following table presents loans modified as part of our COVID-19 deferral programs that remained in a deferral status:
($ in thousands)
Commercial real estate
Commercial and industrial
Construction real estate
Residential real estate
Other
$
Total loan modifications
Percentage of total loans
$
December 31, 2020
26,122
15,708
20,892
255
—
62,977
0.87 %
Loans in a deferral status at December 31, 2020 listed above include $30.3 million of loans receiving more than one deferral. The deferral
modifications are primarily set to expire in the first quarter of 2021.
Potential problem loans
Potential problem loans are unimpaired loans with a risk rating of 8-Substandard still accruing interest. See “Item 8. Note 5 – Loans” for the
definitions of risk ratings. Potential problem loans, which are not included in nonperforming loans, were $80 million, or 1.05%, o f loans
outstanding at December 31, 2020, compared to $56 million, or 1.20%, of loans outstanding at December 31, 2019. Potential problem loans at
December 31, 2020 include the addition of $30.7 million of PCI loans previously accounted for in performing loan pools. For these loans,
payment of principal and interest is current and the loans are performing; however, some doubts exist as to the borrower’s ability to continue
to comply with repayment terms. Potential problem loans include loans to companies characterized by significant losses or where downward
trends in financial performance have been identified, or are in an industry experiencing significant difficulty.
Other real estate
Other real estate at December 31, 2020 and December 31, 2019 was $5.3 million and $6.3 million, respectively.
At December 31, 2020, other real estate was comprised of four properties located in the St. Louis region and four properties in New Mexico
consisting of a mix of commercial, land, and residential.
The following table summarizes the changes in other real estate:
($ in thousands)
Other real estate, beginning of period
Additions and expenses capitalized to prepare property for sale
Additions from acquisition
Writedowns in value
Sales
Other real estate, end of period
Writedowns in fair value were recorded in loan, legal, and other real estate expense.
Year ended December 31,
2020
2019
$
$
6,344 $
756
—
(1,104)
(666)
5,330 $
469
8,148
3,225
(812)
(4,686)
6,344
46
Investments
At December 31, 2020, our portfolio of investment securities was $1.4 billion, or 14%, of total assets. The portfolio is comprised of both
available-for-sale and held-to-maturity securities.
Other investments primarily consist of the FHLB capital stock, common stock investments related to our trust preferred securities, community
development funds, and other investments in private equity funds, primarily SBICs.
The table below sets forth the carrying value of investment securities held by the Company at the dates indicated:
($ in thousands)
Obligations of U.S. Government sponsored enterprises
Obligations of states and political subdivisions
Agency mortgage-backed securities
U.S. Treasury Bills
Corporate debt securities
Other investments: FHLB capital stock
Other investments
Total
2020
December 31,
2019
2018
Amount
%
Amount
%
Amount
$
$
15,161
592,556
639,314
11,466
141,991
10,774
37,991
1,449,253
1.0 % $
40.9 %
44.1 %
0.8 %
9.8 %
0.8 %
2.6 %
100.0 % $
10,046
224,728
948,367
10,226
123,116
15,673
22,371
1,354,527
0.7 % $
16.6 %
70.0 %
0.8 %
9.1 %
1.2 %
1.6 %
100.0 % $
98,498
39,316
639,309
9,925
—
9,158
17,496
813,702
%
12.1 %
4.8 %
78.6 %
1.2 %
— %
1.1 %
2.2 %
100.0 %
The Company had no debt securities classified as trading at December 31, 2020, 2019, or 2018.
The following table summarizes expected maturity and tax-equivalent yield information on the investment portfolio at December 31, 2020:
($ in thousands)
Obligations of U.S. Government-
sponsored enterprises
Obligations of states and political
subdivisions
Agency mortgage-backed securities
U.S. Treasury Bills
Corporate debt securities
FHLB capital stock
Other investments
Total
Within 1 year
1 to 5 years
5 to 10 years
Over 10 years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
No Stated Maturity
Amount
Yield
Total
Amount
Yield
$ 10,164
2.12 % $
—
— % $
4,997
0.75 % $
—
— % $
—
— % $
15,161
1.67 %
1,077
27,012
1,000
—
—
—
$ 39,253
6.02 %
3.19 %
0.11 %
— %
— %
— %
18,107
526,540
10,466
8,239
—
—
2.91 % $ 563,352
2.58 %
3.00 %
2.47 %
3.23 %
— %
— %
13,969
60,284
—
133,752
—
—
2.98 % $ 213,002
3.35 %
2.95 %
— %
3.37 %
— %
— %
559,403
25,478
—
—
—
—
3.19 % $ 584,881
2.89 %
1.58 %
— %
— %
— %
— %
—
—
—
—
10,774
37,991
2.83 % $ 48,765
592,556
— %
639,314
— %
11,466
— %
141,991
— %
10,774
4.23 %
0.56 %
37,991
1.37 % $ 1,449,253
2.90 %
2.94 %
2.27 %
3.36 %
4.23 %
0.56 %
2.89 %
Yields on tax-exempt securities are computed on a taxable equivalent basis using a tax rate of 24.7%. Expected maturities will differ from
contractual maturities, as borrowers may have the right to call or repay obligations with or without prepayment penalties.
47
Deposits
The following table shows the breakdown of the Company’s deposits by type for the periods indicated:
($ in thousands)
Noninterest-bearing deposit accounts
Interest-bearing transaction accounts
Money market accounts
Savings accounts
Total core deposits
Certificates of deposit:
Brokered
Other
Total deposits
$
2020
2,711,828
1,768,497
2,327,066
627,903
7,435,294
50,209
499,886
$
Years ended December 31,
2019
1,327,348
1,367,444
1,713,615
536,169
4,944,576
$
215,758
610,689
2018
1,100,718
1,037,684
1,565,729
199,425
3,903,556
198,981
485,448
$7,985,389
$5,771,023
$4,587,985
% Increase (decrease)
2020 vs. 2019
2019 vs. 2018
104.3 %
29.3 %
35.8 %
17.1 %
(76.7)%
(18.1)%
38.4 %
20.6 %
31.8 %
9.4 %
168.9 %
8.4 %
25.8 %
25.8 %
Core deposits / Total deposits
Noninterest-bearing deposits / Total deposits
93 %
34 %
86 %
23 %
85 %
24 %
Core deposits, defined as total deposits excluding certificates of deposits, were $7.4 billion at December 31, 2020, an increase of $2.5 billion,
or 50%, from December 31, 2019. The increase in 2020 was primarily due to the Seacoast acquisition and PPP loan fundings. Certificates of
deposit, the highest cost portion of the deposit portfolio, declined $0.3 million in 2020.
The following table sets forth the maturities of certificates of deposit of $100,000 or more as of December 31, 2020:
($ in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
$
$
Total
84,724
56,383
118,337
68,620
328,064
Shareholders’ equity
Shareholders’ equity totaled $1.1 billion at December 31, 2020, an increase of $211.8 million, or 24%, from December 31, 2019.
Significant activity during the year ended December 31, 2020 included the following:
•
•
•
•
•
increase from the issuance of approximately 5.0 million shares of common stock for the Seacoast acquisition reflecting approximately
$167 million of consideration;
increase from net income of $74.4 million;
net increase in fair value of available-for-sale securities and cash flow hedges of $19.4 million;
decrease from dividends paid on common stock of $19.8 million; and
decrease from share repurchase of $15.3 million, pursuant to the Company’s publicly-announced stock repurchase program.
Liquidity and Capital Resources
Liquidity
The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-
effective manner to meet our commitments as they become due. Typical demands on liquidity are changes in deposit levels, maturing time
deposits which are not renewed, and fundings under credit
48
commitments to customers. Funds are available from a number of sources, such as the core deposit base and loans and securities repayments
and maturities.
Additionally, liquidity is provided from lines of credit with the FHLB, the Federal Reserve, and correspondent banks; the ability to acquire
large and brokered deposits, sales of the securities portfolio, and the ability to sell loan participations to other banks. These alternatives are an
important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.
The Company’s Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Bank’s
Board of Directors. Our liquidity position is monitored daily. Our liquidity management framework includes measurement of several key
elements, such as the loan to deposit ratio, a liquidity ratio, and a dependency ratio. The Company’s liquidity framework also incorporates
contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits
and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management
and is achieved by strategically varying depositor types, terms, funding markets, and instruments.
Liquidity from asset categories is provided through cash and interest-bearing deposits with other banks, which totaled $537.7 million at
December 31, 2020, compared to $167.3 million at December 31, 2019. The low interest rate environment, coupled with an uncertain
outlook and government stimulus, such as the PPP, have increased liquidity for the banking industry, including the Company.
Investment securities are another important tool to the Company’s liquidity objectives. Securities totaled $1.4 billion at December 31, 2020,
and included $526 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining
$874 million could be pledged or sold to enhance liquidity, if necessary.
Liability liquidity funding sources are available to increase financial flexibility. In addition to amounts currently borrowed, at December 31,
2020, the Company could borrow an additional $739 million from the FHLB of Des Moines under blanket loan pledges and has an additional
$921 million available from the Federal Reserve Bank under a pledged loan agreement. The Company also has unsecured federal funds lines
with six correspondent banks totaling $90 million.
In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan
commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management
considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company has $2 billion
in unused commitments as of December 31, 2020. While this commitment level would exhaust the majority the Company’s current liquidity
resources, the nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.
At the holding company level, our primary funding sources are dividends and payments from the Bank and proceeds from the issuance of
equity (i.e. stock option exercises, stock offerings) and debt instruments. The main use of this liquidity is to provide the funds necessary to
pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The holding
company maintains a revolving line of credit for an aggregate amount up to $25 million, all of which is available at December 31, 2020. The
line of credit has a one-year term and matures in February 2021 and is in the process for renewal. The proceeds can be used for general
corporate purposes.
The Company has an effective automatic shelf registration statement on Form S-3 allowing for the issuance of various forms of equity and
debt securities. The Company’s ability to offer securities pursuant to the registration statement depends on market conditions and the
Company’s continuing eligibility to use the Form S-3 under rules of the SEC.
Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets.
Deterioration in any of these factors could have a negative impact on the Company’s ability to
49
access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process.
The Bank is subject to regulations and, among other things, may be limited in its ability to pay dividends or transfer funds to the parent
company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately
available for the payment of cash dividends to the Company’s shareholders or for other cash needs.
Capital Resources
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the following table) of total and tier 1 capital to risk-weighted assets, and of tier 1 capital to average assets. To be
categorized as “well-capitalized”, banks must maintain minimum total risk-based (10%), tier 1 risk-based (8%), common equity tier 1 risk-
based (6.5%), and tier 1 leverage ratios (5%). As of December 31, 2020, and December 31, 2019, the Company and the Bank met all capital
adequacy requirements to which they are subject.
The Bank met the definition of “well-capitalized” at each of December 31, 2020, 2019, and 2018. Refer to “Item 8. Note 15 – Regulatory
Matters” for a summary of our risk-based capital and leverage ratios.
The following table summarizes the Company’s various capital ratios at the dates indicated:
($ in thousands)
Total capital to risk weighted assets
Tier 1 capital to risk weighted assets
Common equity tier 1 capital to risk weighted assets
Leverage ratio (Tier 1 capital to average assets)
Tangible common equity to tangible assets
Total risk-based capital
Tier 1 capital
Common equity tier 1 capital
1
1
Not a required regulatory capital ratio
2020
December 31,
2019
2018
14.9 %
12.1 %
10.9 %
10.0 %
8.4 %
12.9 %
11.4 %
9.9 %
10.1 %
8.9 %
13.0 %
11.1 %
9.8 %
10.3 %
8.7 %
$
$
1,094,601
889,527
795,873
$
804,273
710,480
616,825
650,859
556,958
489,301
The following table summarizes the Bank’s various capital ratios at the dates indicated:
($ in thousands)
Total capital to risk weighted assets
Tier 1 capital to risk weighted assets
Tier 1 common equity to risk weighted assets
Leverage ratio (Tier 1 capital to average assets)
Total risk-based capital
Tier 1 capital
Common equity tier 1 capital
2020
13.7 %
12.5 %
12.5 %
10.3 %
December 31,
2019
12.4 %
11.7 %
11.7 %
10.3 %
$
$
1,004,839
913,169
913,116
$
769,254
725,461
725,406
2018
12.3 %
11.4 %
11.4 %
10.5 %
611,197
567,296
567,239
Well-Capitalized
Minimum %
10.0%
8.0%
6.5%
5.0%
50
The Company believes the tangible common equity and regulatory capital ratios are important measures of capital strength even though they
are considered to be non-GAAP measures. The tables further within MD&A reconcile these ratios to U.S. GAAP.
Risk Management
Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company faces market risk in
the form of interest rate risk through transactions other than trading activities. Market risk from these activities, in the form of interest rate
risk, is measured and managed through a number of methods. The Company uses financial modeling techniques to measure interest rate risk.
These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by the Bank’s
Asset/Liability Management Committee and approved by the Bank’s Board of Directors are used to monitor exposure of earnings at risk.
General interest rate movements are used to develop sensitivity as management believes it has no primary exposure to a specific point on the
yield curve. These limits are based on the Company’s exposure to immediate and sustained parallel rate movements, either upward or
downward. The Company does not have any direct market risk from commodity exposures.
Interest Rate Risk
Our interest rate risk management practices are aimed at optimizing net interest income, while guarding against deterioration that could be
caused by certain interest rate scenarios. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing
liabilities. We attempt to maintain interest-earning assets, comprised primarily of both loans and investments, and interest-bearing liabilities,
comprised primarily of deposits, maturing or repricing in similar time horizons in order to manage any impact from market interest rate
changes according to our risk tolerance. The Company uses an earnings simulation model to measure earnings sensitivity to changing rates.
The Company determines the sensitivity of its short-term future earnings to a hypothetical plus or minus 100 to 300 basis point parallel rate
shock through the use of simulation modeling. The simulation of earnings includes the modeling of the balance sheet as an ongoing entity.
Future business assumptions involving administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of
maturing assets and liabilities are included. These items are then modeled to project net interest income based on a hypothetical change in
interest rates. The resulting net interest income for the next 12-month period is compared to the net interest income amount calculated using
flat rates. This difference represents the Company’s earnings sensitivity to a positive or negative 100 basis points parallel rate shock.
The following table summarizes the projected impact of interest rate shocks on net interest income at December 31, 2020:
1
Annual % change
in net interest income
10.7%
6.2%
2.0%
Rate Shock
+ 300 bp
+ 200 bp
+ 100 bp
1
Due to the current levels of interest rates, the downward shock scenarios are not shown.
In addition to the rate shocks shown in the table above, the Company models net interest income under various dynamic interest rate
scenarios. In general, changes in interest rates are positively correlated with changes in net interest income.
The Company occasionally uses interest rate derivative instruments as an asset/liability management tool to hedge mismatches in interest rate
exposure indicated by the net interest income simulation described above. They are used to modify the Company’s exposures to interest rate
fluctuations and provide more stable spreads between loan yields and the rate on their funding sources. At December 31, 2020, the Company
had $62.0 million in derivative
51
contracts used to manage interest rate risk. Derivative financial instruments are also discussed in “Item 8. Note 7 – Derivative Financial
Instruments.”
The United Kingdom’s Financial Conduct Authority (“FCA”) announced in 2017 that market participants should not rely on LIBOR after
2021. LIBOR is the most liquid and common interest rate index in the world and is commonly referenced in financial instruments. While the
Ice Benchmark Administration Ltd., who administers LIBOR, has said that it intends to continue to produce LIBOR after 2021, there can be
no guarantee that it will continue without the FCA compelling or persuading LIBOR panel banks to submit quotes. The Federal Reserve’s
Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Funding Rate (“SOFR”) replace LIBOR.
However, at this time, the Company has not identified a replacement index for LIBOR.
We have exposure to LIBOR in various financial contracts. Instruments that may be impacted include loans, securities, debt instruments and
derivatives, among other financial contracts indexed to LIBOR and that mature after December 31, 2021. We have an internal working group
composed of members from legal, credit, finance, operations, risk and audit to monitor developments, develop policies and procedures, assess
the impact to the Company, consider relevant options and to determine an appropriate replacement index for affected contracts that expire
after the expected discontinuation of LIBOR on December 31, 2021. We are actively working to amend and address impacted contracts to
allow for a replacement index. However, amending certain contracts indexed to LIBOR may require consent from the counterparties which
could be difficult and costly to obtain in certain limited circumstances. As of December 31, 2020, the Company’s financial contracts indexed
to LIBOR included $2.5 billion in loans, $239.2 million in deposits and borrowings, and $992.2 million (notional) in derivatives.
In addition, LIBOR is used in the Company’s analysis of the fair value of tax credits and may be referenced in other financial contracts not
included in the discussion above.
The Company has $4.1 billion in variable rate loans as of December 31, 2020. Of these loans, $1.7 billion, or 37.0%, have a floor. $2.5 billion
in variable rate loans are indexed to LIBOR, $1.3 billion are indexed to the prime rate, and $302 million are indexed to other rates.
Contractual Obligations, Off-Balance Sheet Risk, and Contingent Liabilities
Through the normal course of operations, the Company has entered into certain contractual obligations and other commitments. Such
obligations relate to funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial
services provider, the Company routinely enters into commitments to extend credit. While contractual obligations represent future cash
requirements of the Company, a significant portion of commitments to extend credit may expire without being drawn upon. Such
commitments are subject to the same credit policies and approval process accorded to loans made by the Company.
The recorded contractual obligations and other commitments, excluding any contractual interest, at December 31, 2020, were as follows:
1
($ in thousands)
Operating leases
Certificates of deposit
Subordinated debentures and notes
FHLB advances
Notes payable
Total
Less Than
1 Year
Payments due by Period
Over 1 Year
Less than
3 Years
Over 3 Years
Less than
5 Years
Over 5 Years
$
15,397 $
4,353 $
5,610 $
550,095
209,750
50,000
30,000
384,563
—
—
7,143
113,208
—
—
11,428
3,168 $
46,744
—
50,000
11,429
2,266
5,580
209,750
—
—
(1) Interest charges on related contractual obligations were excluded from reported amounts as the potential cash outflows would have corresponding cash inflows from
interest-earning assets.
52
The contractual commitments of off-balance sheet financial instruments at December 31, 2020, were as follows:
`
($ in thousands)
Commitments to extend credit
Letters of credit
State tax credits
Limited partnership commitments
Less Than
1 Year
Payments due by Period
Over 1 Year
Less than
3 Years
Over 3 Years
Less than
5 Years
Over 5 Years
1,351,213 $
46,181
12,886
4,556
250,423 $
4,665
11,587
18,844
132,077 $
125
—
—
212,355
—
—
—
$
Total
1,946,068 $
50,971
24,473
23,400
See “Item 8. Note 18 – Commitments” for narrative disclosure regarding off-balance sheet arrangements.
As of December 31, 2020, we had liabilities associated with uncertain tax positions of $3.1 million. The table above does not include these
liabilities due to the high degree of uncertainty regarding the future cash flows associated with these amounts.
The Company also enters into derivative contracts under which the Company either receives cash from or pays cash to counterparties
depending on changes in interest rates. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value
representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The
fair value of these contracts changes daily as market interest rates change.
CRITICAL ACCOUNTING POLICIES
The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of
operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are
inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be
inaccurate based on actual experience. In the event that different assumptions or conditions were to prevail, and depending upon the severity
of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The
impact and any associated risks related to our critical accounting policies on our business operations are discussed throughout “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial
results. For a detailed discussion on the application of these and other accounting policies, see “Item 8. Note 1 – Summary of Significant
Accounting Policies.”
The Company has prepared all of the consolidated financial information in this report in accordance with GAAP. The Company makes
estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include
the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income
taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its
estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which
management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances
dictate. Decreased real estate values, volatile credit markets, and persistent high unemployment have combined to increase the uncertainty
inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ
significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in
the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates.
Acquisitions
Acquisitions and Business Combinations are accounted for using the acquisition method of accounting. The assets and liabilities of the
acquired entities have been recorded at their estimated fair values at the date of acquisition.
53
Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable
intangible assets.
The purchase price allocation process requires an estimation of the fair values of the assets acquired and the liabilities assumed. When a
business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the Company includes
an estimate of the acquisition-date fair value as part of the cost of the combination. To determine the fair values, the Company relies on third
party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The results
of operations of the acquired business are included in the Company’s consolidated financial statements from the respective date of
acquisition. Merger-related costs are costs the Company incurs to effect a business combination. Merger-related expenses include costs
directly related to merger or acquisition activity and include legal and professional fees, system consolidation and conversion costs, and
compensation costs such as severance and retention incentives for employees impacted by acquisition activity. The Company accounts for
merger-related costs as expenses in the periods in which the costs are incurred and the services are received.
Allowance for Credit Losses
On January 1, 2020, the Company adopted Accounting Standard Update 2016-13 “Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” This standard, referred to as CECL, requires an estimate of lifetime expected credit
losses on certain financial assets measured at amortized cost.
The Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL. The
ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management’s estimate of experience,
current conditions, and reasonable and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the
portfolios are segregated into pools that share similar risk characteristics that are then further segregated by credit grades. Loans that do not
share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The Company
estimates the amount of the allowance based on historical loan loss experience, adjusted for current and forecasted economic conditions,
including unemployment, changes in GDP, and commercial and residential real estate prices. The Company’s forecast of economic conditions
uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic
conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of
the allowance, could change significantly and have a direct impact on the Company’s credit costs.
Goodwill and Other Intangible Assets
The Company completes a goodwill impairment test in the fourth quarter each year or whenever events or changes in circumstances indicate
that the Company may not be able to recover the goodwill or intangible assets respective carrying amounts. The impairment test involves the
use of various estimates and assumptions. Management believes the estimates and assumptions utilized are reasonable. However, the
Company may incur impairment charges related to goodwill or intangible assets in the future due to changes in business prospects or other
matters that could impact estimates and assumptions.
Intangible assets other than goodwill, such as core deposit intangibles, that are determined to have finite lives are amortized over their
estimated remaining useful lives. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset.
54
Impact of Inflation and Changing Prices
Our consolidated financial statements and related data presented in this Annual Report on Form 10-K have been prepared in accordance with
U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollar amounts (except with
respect to securities classified as available-for-sale which are carried at market value) without considering the changes in the relative
purchasing power of money over time due to inflation. Substantially all of our assets and liabilities are monetary in nature; as a result, interest
rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same magnitude as the price of goods and services.
Effects of New Accounting Pronouncements
See “Item 8. Note 22 – New Authoritative Accounting Guidance” for information on recent accounting pronouncements and their impact, if
any, on our consolidated financial statements.
Use of Non-GAAP Financial Measures
The Company’s accounting and reporting policies conform to U.S. GAAP and the prevailing practices in the banking industry. However, the
Company provides other financial measures, such as core efficiency ratio, tangible common equity ratio, return on average tangible common
equity, and tangible book value per common share, in this filing that are considered “non-GAAP financial measures.” Generally, a non-
GAAP financial measure is a numerical measure of a company’s financial performance, financial position, or cash flows that exclude (or
include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with
GAAP.
The Company considers its core efficiency ratio, tangible common equity ratio, return on average tangible common equity, and tangible book
value per common share, collectively “core performance measures” presented in this Annual Report on Form 10-K, as relevant measures of
financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact
of certain non-comparable items, and the Company’s operating performance on an ongoing basis. Core performance measures exclude certain
other income and expense items such as merger-related expenses, facilities charges, and the gain or loss on sale of investment securities, the
Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing basis. The attached tables
contain a reconciliation of these core performance measures to the GAAP measures. The Company believes that the tangible common equity
ratio provides useful information to investors about the Company’s capital strength even though it is considered to be a non-GAAP financial
measure and is not part of the regulatory capital requirements to which the Company is subject.
The Company believes the tangible common equity ratio provides useful information to investors about the Company’s capital strength, even
though it is considered to be a non-GAAP financial measure, and is not part of the regulatory capital requirements to which the Company is
subject.
The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios,
provide meaningful supplemental information regarding the Company’s performance and capital strength. The Company’s management uses,
and believes investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company’s operating results and
related trends and when forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and
not as a substitute for or preferable to, ratios prepared in accordance with GAAP. The Company has provided a reconciliation of, where
applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of
the non-GAAP calculation of the financial measure for the periods indicated.
55
Reconciliations of Non-GAAP Financial Measures
Core Efficiency Ratio
($ in thousands)
Net interest income
Less: Incremental accretion income
Core net interest income
Total noninterest income
Less: Other income from non-core acquired assets
Less: Gain on sale of investment securities
Less: Other non-core income
Core noninterest income
Total core revenue
Total noninterest expense
Less: Merger related expenses
Less: Other expenses (credits) related to non-core acquired loans
Less: Facilities disposal charge
Less: Other non-core expenses
Core noninterest expense
Core efficiency ratio
Tangible Common Equity and Tangible Common Equity Ratio
($ in thousands)
Total shareholders' equity
Less: Goodwill
Less: Intangible assets
Tangible common equity
Total assets
Less: Goodwill
Less: Intangible assets
Tangible assets
Tangible common equity to tangible assets
December 31, 2020
270,001
4,083
265,918
54,503
—
421
265
53,817
319,735
167,159
4,174
57
—
—
162,928
For the Years ended
December 31, 2019
238,717
4,783
233,934
49,176
1,372
243
266
47,295
281,229
165,485
17,969
257
—
—
147,259
$
$
$
$
$
$
$
$
December 31, 2018
191,905
3,701
188,204
38,347
1,048
9
675
36,615
224,819
119,031
1,271
(163)
239
682
117,002
50.96 %
52.36 %
52.04 %
2020
For the Years ended December 31,
2019
2018
1,078,975
260,567
23,084
795,324
9,751,571
260,567
23,084
9,467,920
$
$
$
$
867,185
210,344
26,076
630,765
7,333,791
210,344
26,076
7,097,371
$
$
$
$
603,804
117,345
8,553
477,906
5,645,662
117,345
8,553
5,519,764
8.40 %
8.89 %
8.66 %
$
$
$
$
$
$
$
$
56
Return on Average Tangible Common Equity
($ in thousands)
Average shareholder’s equity
Less average goodwill
Less average intangible assets
Average tangible common equity
Net Income
Return on average tangible common equity
Tangible Book Value Per Common Share
($ in thousands)
Tangible common equity (calculated above)
Period end shares outstanding
Tangible book value per common share
2020
For the Years ended December 31,
2019
2018
902,875
217,205
23,551
662,119
74,384
11.23 %
$
$
$
795,477
193,804
24,957
576,716
92,739
16.08 %
$
$
$
576,960
117,345
9,763
449,852
89,217
19.83 %
2020
For the Years ended December 31,
2019
2018
795,324 $
630,765 $
477,906
31,210
26,543
25.48 $
23.76 $
22,812
20.95
$
$
$
$
$
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to “Risk Factors” included in Item 1A and “Risk Management” and “Interest Rate Risk” included in Management’s Discussion
and Analysis under Item 7.
57
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Enterprise Financial Services Corp and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
Page Number
59
64
65
66
67
68
70
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and Board of Directors of Enterprise Financial Services Corp
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Enterprise Financial Services Corp and subsidiaries (the “Company”) as of
December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows,
for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 19,
2021, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, on January 1, 2020, the Company adopted ASU 2016-13 “Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” applicable to financial assets measured at amortized cost
including loan receivables and held to maturity debt securities.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
59
Allowance for Credit Losses — Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company utilizes a discounted cash flow (“DCF”) method to measure the Allowance for Credit Losses (“ACL”) on loans collectively
evaluated that are sub-segmented by credit risk levels. The DCF method incorporates assumptions for probability of default, loss given
default, prepayments and curtailments over the contractual term of the loans. In determining the probability of default, the Company utilized a
regression analysis to determine certain economic factors that are relevant loss drivers in the portfolio segments based on historical or peer
evaluations such as unemployment or gross domestic product. Additionally, the Company applies qualitative adjustments to address risks not
directly captured in the quantitative reserve; including to address macroeconomic uncertainty by weighting the forecasted baseline, upside,
and downside economic factors.
We identified the allowance for credit losses as a critical audit matter because of the complexity of the Company’s model and the significant
assumptions used by management. Auditing the allowance for credit losses required a high degree of auditor judgment and an increased
extent of effort, including the need to involve credit specialists when performing audit procedures to evaluate the reasonableness of
management’s models and assumptions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s ACL included the following, among others:
a. We tested the design and operating effectiveness of management’s controls covering the key data, assumptions and judgments
impacting the allowance for credit losses.
b. We evaluated the appropriateness of the Company’s accounting policies, methodologies, and elections involved in determining the
allowance.
c. We involved credit specialists to assist us in evaluating the Company’s development of the CECL model, including the selection of
and calibration to economic factors.
d. We assessed the reasonableness of the Company’s qualitative methodology, tested key calculations utilized within the qualitative
estimate and agreed underlying data within the calculation to source documents.
Acquisition of Seacoast Commerce Banc Holdings (“Seacoast”) —Refer to Note 2 to the financial statements
Critical Audit Matter Description
On November 12, 2020, the Company closed its acquisition of 100% of Seacoast and its wholly-owned subsidiary, Seacoast Commerce
Bank. The value of the transaction consideration was approximately $169 million. The acquisition of Seacoast has been accounted for as a
business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at
fair value as of the acquisition date. Goodwill of $50 million arising from the acquisition consists largely of the synergies and economies of
scale expected from combining the operations of Seacoast into the Company.
Given that the fair value determination of net assets, specifically the credit assumptions related to the acquired loan balance, required
management to make significant estimates and assumptions related to the associated credit risk, performing audit procedures to evaluate the
reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the
need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s determination of the credit risk associated with these loans included the following, among
others:
60
a. We tested the design and operating effectiveness of controls over the valuation of the acquired loans, including management’s
controls over the determination of credit risk.
b. With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) the discounted cash flow valuation
methodology and (2) credit risk assumption utilized in the calculations by:
i.
Testing the source information underlying the determination of the credit risk assumptions and testing the mathematical
accuracy of the calculation.
ii.
Developing independent estimates and comparing those to the credit risk assumptions selected by management.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 19, 2021
We have served as the Company’s auditor since 2010.
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and Board of Directors of Enterprise Financial Services Corp
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Enterprise Financial Services Corp and subsidiaries (the “Company”) as of
December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework
(2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 19, 2021,
expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of
accounting standard update (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments”.
As described in Management’s Assessment on Internal Control over Financial Reporting, management excluded from its assessment the
internal control over financial reporting at Seacoast Commerce Banc Holdings (“SCBH”), which was acquired on November 12, 2020, and
whose financial statements constitute 14% of total assets and 3% of net interest income of the consolidated financial statement amounts as of
and for the year ended December 31, 2020. Accordingly, our audit did not include the internal control over financial reporting at SCBH.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
62
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 19, 2021
63
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2020 and 2019
($ in thousands, except per share data)
December 31, 2020
December 31, 2019
Assets
Cash and due from banks
Federal funds sold
Interest-earning deposits (including $36,525 and $15,285 pledged as collateral, respectively)
Total cash and cash equivalents
Interest-earning deposits greater than 90 days
Securities available-for-sale
Securities held-to-maturity
Loans held-for-sale
Loans
Less: Allowance for credit losses on loans
Total loans, net
Other investments
Fixed assets, net
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities and Shareholders' equity
Noninterest-bearing deposit accounts
Interest-bearing transaction accounts
Money market accounts
Savings accounts
Certificates of deposit:
Brokered
Other
Total deposits
Subordinated debentures and notes
FHLB advances
Other borrowings
Notes payable
Other liabilities
Total liabilities
Commitments and contingent liabilities (Note 18)
Shareholders' equity:
Preferred stock, $0.01 par value;
5,000,000 shares authorized; 0 shares issued and outstanding
Common stock, $0.01 par value; 45,000,000 shares authorized; 33,190,306 and 28,067,087 shares
issued, respectively
Treasury stock, at cost; 1,980,093 and 1,523,842 shares, respectively
Additional paid in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
64
$
$
$
$
99,760 $
1,519
436,424
537,703
7,626
912,429
487,610
13,564
7,224,935
136,671
7,088,264
48,764
53,169
260,567
23,084
318,791
9,751,571 $
2,711,828 $
1,768,497
2,327,066
627,903
50,209
499,886
7,985,389
203,637
50,000
271,081
30,000
132,489
8,672,596
—
332
(73,528)
697,839
417,212
37,120
1,078,975
9,751,571 $
74,769
3,060
89,427
167,256
3,730
1,135,317
181,166
5,570
5,314,337
43,288
5,271,049
38,044
60,013
210,344
26,076
235,226
7,333,791
1,327,348
1,367,444
1,713,615
536,169
215,758
610,689
5,771,023
141,258
222,406
230,886
34,286
66,747
6,466,606
—
281
(58,181)
526,599
380,737
17,749
867,185
7,333,791
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2020, 2019, and 2018
($ in thousands, except per share data)
Interest income:
Interest and fees on loans
Interest on debt securities:
Taxable
Nontaxable
Interest on interest-earning deposits
Dividends on equity securities
Total interest income
Interest expense:
Deposits
Subordinated debentures and notes
FHLB advances
Notes payable and other borrowings
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Service charges on deposit accounts
Wealth management revenue
Card services revenue
Tax credit income
Miscellaneous income
Total noninterest income
Noninterest expense:
Employee compensation and benefits
Occupancy
Data processing
Professional fees
Merger-related expenses
Other
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per common share
Basic
Diluted
See accompanying notes to consolidated financial statements.
65
Year ended December 31,
2019
2020
2018
$
270,238 $
269,406 $
217,212
24,629
8,397
620
895
304,779
21,049
9,885
2,673
1,171
34,778
270,001
65,398
204,603
11,717
9,732
9,481
6,611
16,962
54,503
92,288
13,457
9,050
3,940
4,174
44,250
167,159
29,030
3,515
2,128
1,055
305,134
49,856
7,507
6,668
2,386
66,417
238,717
6,372
232,345
12,801
9,932
9,154
5,393
11,896
49,176
81,295
12,465
8,242
3,683
17,969
41,831
165,485
$
$
91,947
17,563
74,384 $
116,036
23,297
92,739 $
2.76 $
2.76
3.56 $
3.55
17,469
1,074
1,141
906
237,802
33,769
5,798
5,556
774
45,897
191,905
6,644
185,261
11,749
8,241
6,686
2,820
8,851
38,347
66,039
9,550
6,321
3,134
1,271
32,716
119,031
104,577
15,360
89,217
3.86
3.83
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2020, 2019, and 2018
($ in thousands)
Net income
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on available-for-sale debt securities
Reclassification adjustment for realized (gain) loss on the sale of available-for-sale debt
securities
Reclassification of (gain) loss on held-to-maturity securities
Change in unrealized loss on cash flow hedges arising during the period
Reclassification of loss on cash flow hedges
Other comprehensive income (loss), net
Total comprehensive income
See accompanying notes to consolidated financial statements.
2020
Year ended December 31,
2019
2018
$
74,384 $
92,739 $
89,217
23,944
29,189
(317)
(1,910)
(5,947)
3,601
19,371
93,755 $
37
(33)
(2,262)
100
27,031
119,770 $
(4,626)
(7)
3
—
—
(4,630)
84,587
$
66
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Years ended December 31, 2020, 2019, and 2018
($ in thousands, except per share data)
Balance December 31, 2017
Net income
Other comprehensive loss, net
Cash dividends paid on common shares, $0.47 per share
Repurchase of common shares, 435,435 shares
Issuance under equity compensation plans, 157,882 shares, net
Share-based compensation
Reclassification adjustments for change in accounting policies
Balance December 31, 2018
Net income
Other comprehensive income, net
Cash dividends paid on common shares, $0.62 per share
Repurchase of common shares, 396,737 shares
Issuance under equity compensation plans, 137,271 shares, net
Shares issued in connection with acquisition of Trinity Capital Corporation,
3,990,822 shares
Share-based compensation
Balance December 31, 2019
Net income
Other comprehensive income, net
Cash dividends paid on common shares, $0.72 per share
Repurchase of common shares
Issuance under equity compensation plans, 146,005 shares, net
Shares issued in connection with acquisition of Seacoast Commerce Banc Holdings,
4,977,214 shares
Share-based compensation
Reclassification for the adoption of ASU 2016-13 (CECL)
Balance December 31, 2020
See accompanying notes to consolidated financial statements.
Treasury
Stock
(23,268)
Additional
paid in capital
350,061
$
—
—
—
(19,387)
—
—
—
(42,655)
—
—
—
(15,526)
—
—
—
(58,181)
—
—
—
(15,347)
—
—
—
—
(73,528)
$
$
$
$
$
$
—
—
—
—
(2,577)
3,452
—
350,936
—
—
—
—
(214)
171,845
4,032
526,599
—
—
—
—
77
166,985
4,178
—
697,839
$
$
$
$
$
$
$
Common
Stock
$
$
$
$
$
$
$
238
—
—
—
—
1
—
—
239
—
—
—
—
2
40
—
281
—
—
—
—
1
50
—
—
332
67
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
shareholders’
equity
$
$
$
$
$
$
$
225,360
$
89,217 $
—
(10,845)
—
—
—
834
304,566
$
92,739 $
—
(16,568)
—
—
—
—
380,737
$
74,384 $
—
(19,795)
—
—
—
—
(18,114)
417,212
$
(3,818)
—
(4,630)
—
—
—
—
(834)
(9,282)
—
27,031
—
—
—
—
—
17,749
—
19,371
—
—
—
—
—
—
37,120
$
$
$
$
$
$
$
548,573
89,217
(4,630)
(10,845)
(19,387)
(2,576)
3,452
—
603,804
92,739
27,031
(16,568)
(15,526)
(212)
171,885
4,032
867,185
74,384
19,371
(19,795)
(15,347)
78
167,035
4,178
(18,114)
1,078,975
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2020, 2019, and 2018
($ in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2020
Year ended December 31,
2019
2018
$
74,384
$
92,739
$
89,217
Depreciation
Provision for credit losses
Deferred income taxes
Net amortization of debt securities
Amortization of intangible assets
Gain on sale of investment securities
Mortgage loans originated-for-sale
Proceeds from mortgage loans sold
Loss (gain) on:
Sale of investment securities
Sale of other real estate
Sale of state tax credits
Share-based compensation
Net accretion of loan discount
Changes in other assets and liabilities, net
Net cash provided by operating activities
Cash flows from investing activities:
Acquisition cash purchase price, net of cash and cash equivalents acquired
Net increase in loans
Proceeds received from:
Sale of debt securities, available-for-sale
Paydown or maturity of debt securities, available-for-sale
Paydown or maturity of debt securities, held-to-maturity
Redemption of other investments
Sale of state tax credits held-for-sale
Sale of other real estate
Settlement of bank-owned life insurance policies
Payments for the purchase of:
Available for sale debt securities
Other investments
State tax credits held-for-sale
Fixed assets
Net cash used in investing activities
68
6,152
65,398
(12,578)
6,745
5,673
(223,094)
217,934
(421)
13
(2,016)
4,178
(7,767)
913
135,514
62,114
(700,096)
20,221
329,350
41,377
43,555
14,252
652
1,993
(452,541)
(50,421)
(11,026)
(2,259)
(702,829)
5,719
6,372
5,800
2,973
5,543
(81,941)
77,302
49
(113)
(2,549)
4,032
(10,494)
(12,975)
92,457
(23,377)
(284,235)
357,976
146,132
7,447
61,917
14,689
4,798
—
(577,211)
(68,963)
(11,356)
(6,337)
(378,520)
3,532
6,644
3,307
1,691
2,503
(36,229)
39,310
(9)
(13)
(2,820)
3,452
(1,700)
(77)
108,808
—
(257,872)
1,451
84,189
6,397
50,274
14,718
875
1,256
(172,026)
(51,828)
(6,017)
(3,035)
(331,618)
($ in thousands)
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposit accounts
Net increase in interest-bearing deposit accounts
Proceeds from the issuance of subordinated notes
Proceeds (repayments) from short-term FHLB advances, net
Proceeds from long-term FHLB advances
Repayment of PPPLF advances
Proceeds from notes payable
Repayments of notes payable
Net increase (decrease) in other borrowings
Cash dividends paid on common stock
Repurchase of common stock
Payments for the issuance of equity instruments, net
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Income taxes
Noncash transactions:
Transfer to other real estate owned in settlement of loans
Sales of other real estate financed
Transfer of securities from available-for-sale to held-to-maturity
Transfer to loans from fixed assets for deconsolidation of partnership
Right-of-use assets obtained in exchange for lease obligations
Common shares issued in connection with acquisitions
See accompanying notes to consolidated financial statements.
69
2020
Year ended December 31,
2019
2018
627,756
505,604
61,953
(172,300)
—
(86,096)
—
(4,286)
40,195
(19,795)
(15,347)
78
937,762
370,447
167,256
537,703
35,423
7,514
798
48
352,665
3,336
1,623
167,035
$
$
$
$
$
$
57,551
44,300
—
95,500
50,000
—
41,000
(8,714)
9,436
(16,568)
(15,526)
(212)
256,767
(29,296)
196,552
167,256
65,667
13,582
8,148
621
116,303
—
5,208
171,885
$
$
$
(23,189)
454,760
—
(102,500)
—
—
2,000
—
(32,224)
(10,845)
(19,387)
(2,576)
266,039
43,229
153,323
196,552
45,650
10,136
876
—
—
—
—
—
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used by the Company in the preparation of the consolidated financial statements are summarized below.
Business and Consolidation
Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate
customers primarily located in the Arizona, California, Kansas, Missouri, Nevada, and New Mexico markets through its banking subsidiary,
Enterprise Bank & Trust. All intercompany accounts and transactions have been eliminated.
The Company and its banking subsidiary are subject to the regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory agencies. The Company has one operating segment.
Use of Estimates
The consolidated financial statements of the Company have been prepared in conformity with GAAP. In preparing the consolidated financial
statements, management is required to make estimates and assumptions, which significantly affect the reported amounts in the consolidated
financial statements. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with
assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best
estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using experience and other factors,
including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts
such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision,
actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic
environment will be reflected in the financial statements in future periods.
Cash Flow Information
For purposes of reporting cash flows, the Company considers cash and due from banks, interest-bearing deposits and federal funds sold that
mature within 90 days of the balance sheet date to be cash and cash equivalents. At December 31, 2019, approximately $9.7 million of cash
and due from banks represented required reserves on deposits maintained by the Company in accordance with Federal Reserve requirements.
There were no required reserves on December 31, 2020.
Recent Accounting Pronouncements
On January 1, 2020, the Company adopted ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments,” (ASU 2016-13) which replaces the incurred loss methodology with an expected loss methodology commonly
referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial
assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit
exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, this standard
made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses to be presented as an
allowance rather than as a write-down on available-for-sale debt securities.
The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost, and off-
balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under the new standard while prior
period amounts continue to be reported in accordance with
70
previously applicable GAAP. The Company recorded an after-tax decrease to retained earnings of $18.1 million as of January 1, 2020 for the
cumulative effect of adopting this standard.
The Company adopted this standard using the prospective transition approach for PCD assets that were previously classified as PCI assets.
Management did not reassess whether PCI assets met the criteria of PCD assets as of the date of the adoption.
The Company elected not to maintain PCI pools for certain loans which are now accounted for individually. Thus they are now included in
nonperforming and classified loans. Management did not reassess whether modifications to individual acquired financial assets accounted for
in pools were troubled debt restructurings as of the date of adoption.
The following table illustrates the impact of adoption:
($ in thousands)
Assets:
Loans
Allowance for credit losses on loans
Allowance for credit losses on held-to-maturity debt securities
Deferred tax asset
December 31, 2019
Impact of Adoption
January 1, 2020
$
5,314,337 $
43,288
—
14,851
7,091 $
28,387
303
5,898
5,321,428
71,675
303
20,749
Liabilities:
Reserve for unfunded commitments
Shareholders’ Equity
Retained Earnings
430
2,413
2,843
380,737
(18,114)
362,623
On January 1, 2020, the Company adopted ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement”. The Company previously selected the option to adopt the removal or modification of
disclosures during the second quarter of 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of
significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty
are applied prospectively for only the most recent interim or annual period presented. All other amendments are applied retrospectively to all
periods presented upon their effective date. The adoption of this update did not have a material effect on the Company's consolidated financial
statements.
On January 1, 2020, the Company adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, (ASU 2017-04). ASU 2017-04 simplifies the quantitative measurement of goodwill by eliminating Step 2 from the goodwill
impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its
annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. The adoption of this update did not have a material effect on the
Company's consolidated financial statements.
ASU 2021-01, Reference Rate Reform (Topic 848): Scope (ASU 2021-01). ASU 2021-01 was issued in January 2021 and provided
optional expedients and exceptions in ASC 848 to contracts, hedging relationships, and other transactions affected by reference rate reform if
certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or
another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the
amendments do
71
not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging
relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end
of the hedging relationship. The amendments in this update were effective immediately upon issuance and did not have a material effect on
the Company's consolidated financial statements.
Investments
The Company has classified all investments in debt securities as available-for-sale or held-to-maturity.
Securities classified as available-for-sale are carried at fair value. Unrealized holding gains and losses for available-for-sale securities are
excluded from earnings and reported as a net amount in a separate component of shareholders’ equity until realized. All previous fair value
adjustments included in the separate component of shareholders’ equity are reversed upon sale.
Securities classified as held-to-maturity are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts.
Prior to the adoption of ASU 2016-13 on January 1, 2020, declines in the fair value of securities below their cost deemed to be other-than-
temporary were reflected in operations as realized losses. In estimating other-than-temporary impairment losses, management evaluated
investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis required management to consider
various factors, which included (1) the present value of the cash flows expected to be collected compared to the amortized cost of the
security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security,
and (5) the intent to sell the security or whether it’s more likely than not the Company would be required to sell the security before its
anticipated recovery in market value.
An ACL on held-to-maturity securities is deducted from the amortized cost basis of the securities to reflect the expected amount to be
collected. When it is determined that a security will not be collected, the balance is written-off through the allowance. In evaluating the need
for an ACL, securities with similar risk characteristics are grouped and an estimate of expected cash flows is determined using historical loss
experience, adjusted for current and reasonable and supportable forecasts of economic conditions.
For available-for-sale securities in a loss position, the Company evaluates whether the decline in fair value below amortized cost resulted
from a credit loss or other factors. Losses attributed to credit are recognized through an ACL on available-for-sale securities, limited to the
amount that the fair value of securities is less than the amortized cost basis. In assessing credit loss, the Company considers, among other
things, (1) the extent to which fair value is less than the amortized cost basis, (2) adverse conditions specific to the security or industry, (3)
historical payment patterns, (4) the likelihood of future payments, and (5) changes to the rating of a security by a rating agency.
The Company has elected to exclude accrued interest receivable balances from the estimate of the ACL as these amounts are timely written
off as a credit loss expense. Adjustments to the ACL on held-to-maturity and available-for-sale securities are recognized as a component of
the provision for credit losses in the Consolidated Statements of Operations.
Premiums and discounts are amortized or accreted over the expected lives of the respective securities as an adjustment to yield using the
interest method. Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived
using the specific identification method for determining the cost of securities sold.
Loans Held-for-Sale and Servicing Assets
The Company provides long-term financing of one-to-four-family residential real estate by originating fixed and variable rate loans. Long-
term fixed and variable rate loans are usually sold into the secondary market with limited recourse. Upon receipt of an application for a real
estate loan, the Company determines whether the loan will be sold into the secondary market or retained in the Company’s loan portfolio. The
interest rates on the loans sold are
72
locked with the buyer and the Company bears no interest rate risk related to these loans. Mortgage loans held-for-sale are carried at the lower
of cost or fair value, which is determined on a specific identification method. The Company does not retain servicing on these loans.
The Company also originates SBA7(a) loans that generally provides for a guarantee of 75% up to a maximum amount. The guaranteed
portion of the loan can be sold in an active secondary market. For the year ended December 31, 2020, all SBA7(a) loans are considered held-
for-investment; however, as the Company makes the determination to sell the loans, they will be moved into the held-for-sale category. Sales
of SBA guaranteed loans are executed on a servicing retained basis, and the Company retains the rights and obligations to service the loans.
At December 31, 2020, the Company was servicing $296 million in SBA loans and has recorded a related servicing asset of $5.7 million. The
servicing asset is accounted for under the amortization method and is evaluated for impairment. Amortization of the servicing asset is
recorded as a reduction to servicing income.
Gains on the sale of loans held-for-sale are reported net of direct origination fees and costs in the Company’s Consolidated Statements of
Operations.
Loans
Loans are reported at the principal balance outstanding, net of unearned fees, costs, and premiums or discounts on acquired loans. Loan
origination fees, direct origination costs, and premiums or discounts resulting from acquired loans are deferred and recognized over the lives
of the related loans as a yield adjustment using the interest method.
Interest on loans is accrued to income based on the principal balance outstanding. The recognition of interest income is discontinued when a
loan becomes 90 days past due or a significant deterioration in the borrower’s credit has occurred which, in management’s judgment,
negatively impacts the collectibility of the loan. Unpaid interest on such loans is reversed at the time the loan becomes uncollectible and
subsequent interest payments received are generally applied to principal if any doubt exists as to the collectibility of such principal. Loans
that have not been restructured are returned to accrual status when management believes full collectibility of principal and interest is
expected. Non-accrual loans that have been restructured will remain in a non-accrual status until the borrower has made at least six months of
consecutive contractual payments.
The Company has elected to present the accrued interest receivable balance separate from amortized cost basis, to exclude accrued interest
receivable balances from the tabular disclosures, and not to estimate an ACL on accrued interest receivable as these amounts are timely
written off as a credit loss expense.
Accrued interest receivable totaled $31.1 million at December 31, 2020 and was reported in Other Assets on the consolidated balance sheets.
Acquired Loans
Prior to the adoption of ASU 2016-13 on January 1, 2020, PCI loans were acquired in a business combination or transaction, had evidence of
deterioration of credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all
contractually required payments receivable. PCI loans were initially recorded at fair value (as determined by the present value of expected
future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the
investment in the loans, or the “accretable yield,” was recognized as interest income on a level-yield method over the life of the loans.
Contractually required payments for interest and principal that exceeded the undiscounted cash flows expected at acquisition, or the
“nonaccretable difference,” were not recognized as a yield adjustment or as a loss accrual or a valuation allowance. The Company aggregated
individual loans with common risk characteristics into pools of loans. Increases in expected cash flows subsequent to the initial investment
were recognized prospectively through adjustment of the yield on the loans over their remaining lives. Decreases in expected cash flows due
to an inability to collect contractual cash flows were recognized as impairment through the provision for loan losses account. Any allowance
for loan loss on these pools reflected only losses incurred after the acquisition. Disposals of loans, including sales of loans, paydowns,
payments in full or foreclosures resulted in the removal or reduction of the loan from the loan pool.
73
Subsequent to the adoption of ASU 2016-16, acquired loans are separated into two categories based on the credit risk characteristics of the
underlying borrowers as either purchased credit deteriorated (PCD), for loans which have experienced more than insignificant credit
deterioration since origination, or loans with no credit deterioration (non-PCD). At the date of acquisition, an ACL on PCD loans is
determined and added to the amortized cost basis of the individual loans. The difference between the initial amortized cost basis and the par
value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. The ACL on PCD loans
is recorded in the acquisition accounting and no provision for credit losses is recognized at the acquisition date. Subsequent changes to the
ACL are recorded through provision expense. For non-PCD loans, an ACL is established immediately after the acquisition through a charge
to the provision for credit losses.
The ACL for both PCD and non-PCD is determined by pooling loans with similar risk characteristics and using the approach discussed below
under “Allowance for Credit Losses on Loans”.
Impaired Loans
Loans are considered “impaired” when it becomes probable that the Company will be unable to collect all amounts due according to the
loan’s contractual terms. Non-accrual loans, loans past due greater than 90 days and still accruing, unless adequately secured and in the
process of collection, and restructured loans qualify as “impaired loans.” Restructured loans involve the granting of a concession on the terms
of a loan to a borrower experiencing financial difficulty. Concessions may be granted in various forms, including changes in payment
schedule or interest rate.
When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan’s effective interest rate at
origination. Alternatively, impairment can be measured by reference to an observable market price, if one exists, or the fair value of the
collateral for a collateral-dependent loan. Loans and leases, which are deemed uncollectible, are charged off to the allowance for credit losses,
while recoveries of amounts previously charged off are credited to the allowance for credit losses.
Loans are generally placed on non-accrual status when contractually past due 90 days or more as to interest or principal payments.
Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or
interest on loans, it is management’s practice to place such loans on non-accrual status immediately, rather than delaying such action until the
loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed. Income is recorded only to the extent
that a determination has been made that the principal balance of the loan is collectible and the interest payments are subsequently received in
cash, or for a restructured loan, the borrower has made six consecutive contractual payments. If collectibility of the principal is in doubt,
payments received are applied to loan principal.
Loans past due 90 days or more but still accruing interest are also generally included in nonperforming loans. Loans past due 90 days or more
but still accruing are classified as such where the underlying loans are both well secured (the collateral value covers principal and accrued
interest) and in the process of collection.
Allowance for Credit Losses on Loans
The ACL on loans is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected.
Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Management estimates the allowance using relevant available information, from internal and external sources, relating to past events, current
conditions, and reasonable and supportable forecasts. Credit loss experience provides the basis for the estimation of expected credit losses.
Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in
underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in
unemployment rates, property values, or other relevant factors.
74
The ACL on loans is measured on a collective basis when similar risk characteristics exist. The Company has identified the following
portfolio segments:
C&I – C&I loans consist of loans to small and medium-sized businesses in a wide variety of industries. These loans are generally
collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets, and may be supported by other credit
enhancements such as personal guarantees. Risk arises primarily due to a difference between expected and actual cash flows of the borrower.
However, the recoverability of these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans.
The fair value of the collateral securing these loans may fluctuate as market conditions change. Included within C&I are revolving loans
supported by borrowing bases that fluctuate depending on the amount of underlying collateral. A portion of C&I loans consists of sponsor
finance, which are loans with senior debt exposure to private equity backed companies.
CRE – CRE loans include various types of loans for which the Company holds real property as collateral. Commercial real estate lending
activity is typically restricted to owner-occupied properties or to investor properties that are owned by customers with a current banking
relationship. The primary risks of CRE loans include the borrower’s inability to pay, material decreases in the value of the real estate being
held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable. Real estate loans may
be more adversely affected by conditions in the real estate markets or in the general economy.
Construction and Land Development – The Company originates loans to finance construction projects including one- to four-family
residences, multifamily residences, commercial office, and industrial projects. Construction loans are generally collateralized by first liens on
the real estate and have floating interest rates. Construction loans are considered to have higher risks due to construction completion and
timing risk, and the ultimate repayment being sensitive to interest rate changes, governmental regulation of real property and the availability
of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans.
Adverse economic conditions may negatively impact the real estate market which could affect the borrowers’ ability to complete and sell the
project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change.
Residential Real Estate – The Company originates loans to finance one- to four-family residences, secured by both first and second liens.
Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral. Residential loans with a
second lien are inherently riskier due to the junior lien position.
Agricultural – Agricultural loans are generally secured with equipment, cattle, crops or other non-real property and at times the underlying
real property. Agricultural loans are primarily included as a component of CRE and C&I loans.
Consumer – The Company provides a broad range of consumer loans to customers, including personal lines of credit, credit cards and
automobile loans. Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral.
Consumer loans are included as a component of Other loans.
The Company utilizes a DCF method to measure the ACL on loans collectively evaluated that are sub-segmented by credit risk levels. The
DCF method incorporates assumptions for probability of default, loss given default, prepayments and curtailments over the contractual term
of the loans. In determining the probability of default, the Company utilized a regression analysis to determine certain economic factors that
are relevant loss drivers in the portfolio segments based on historical or peer evaluations. National unemployment is a loss driver used in
nearly all portfolios, except Consumer. The annual percentage change in gross domestic product is also used in C&I, Construction,
Agricultural and Consumer portfolios. The annual percentage change in a commercial real estate index, national house price index and the
consumer price index are used in the CRE, Residential Real Estate and Consumer portfolios, respectively. The contractual term excludes
expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the
reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included
in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
75
The Company uses a one-year reasonable and supportable forecast that considers baseline, upside and downside economic scenarios. For
periods beyond the forecast period, the Company reverts to historical loss rates on a straight-line basis over a one-year period.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the
collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the
collateral at the reporting date, adjusted for selling costs as appropriate.
Loan Charge-Offs
Loans are charged-off when the primary and secondary sources of repayment (cash flow, collateral, guarantors, etc.) are less than their
carrying value.
Other Real Estate
Other real estate represents property acquired through foreclosure or deeded to the Company in lieu of foreclosure on loans on which the
borrowers have defaulted on the payment of principal or interest. Other real estate is recorded on an individual asset basis at the lower of cost
or fair value less estimated costs to sell. The fair value of other real estate is based upon estimates of future cash flows, market value of
similar assets, if available, or independent appraisals. These estimates involve significant uncertainties and judgments. As a result, fair value
estimates may not be realizable in a current sale or settlement of the other real estate. Subsequent reductions in fair value are expensed within
noninterest expense.
Gains and losses resulting from the sale of other real estate are credited or charged to current period earnings. Costs of maintaining and
operating other real estate are expensed as incurred, and expenditures to complete or improve other real estate properties are capitalized if the
expenditures are expected to be recovered upon ultimate sale of the property.
Fixed Assets
Buildings, leasehold improvements, furniture, fixtures, equipment, and capitalized software are stated at cost less accumulated depreciation.
All categories are computed using the straight-line method over their respective estimated useful lives. Furniture, fixtures and equipment is
depreciated over three to ten years, buildings and leasehold improvements over ten to forty years, and capitalized software over three years
based upon estimated lives or lease obligation periods.
State Tax Credits
The Company has purchased the rights to receive 10-year streams of state tax credits at agreed upon discount rates and sells such tax credits
to its clients and others. State tax credits are accounted for at cost. The Company is also a minority partner in a joint venture, accounted for as
an equity method investment, that purchases state income tax credits for resale to customers. Income from both the sale of state tax credits
and earnings from the joint venture are reported as tax credit income in the Consolidated Statements of Operations.
Cash Surrender Value of Life Insurance
The Company has purchased bank-owned life insurance policies on certain bank officers. Bank-owned life insurance is recorded at its cash
surrender value. Changes in the cash surrender values, including death benefits in excess of the carrying amount, are included in noninterest
income.
Federal Home Loan Bank Stock
The Bank, as a member of the FHLB, is required to maintain an investment in the capital stock of the FHLB. The stock is redeemable at par
by the FHLB, and is, therefore, carried at cost and periodically evaluated for impairment. The Company records FHLB dividends in interest
income.
76
Goodwill and Other Intangible Assets
The Company tests goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the Company
may not be able to recover the respective asset’s carrying amount. The Company’s annual test for impairment was performed in the fourth
quarter of December 31, 2020. Such tests involve the use of estimates and assumptions. Core deposit intangibles are amortized using an
accelerated method over an estimated useful life of approximately 10 years.
Potential impairments to goodwill must first be identified by performing a qualitative assessment which evaluates relevant events or
circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If this test
indicates it is more likely than not that goodwill has been impaired, then a quantitative impairment test is completed. The quantitative
impairment test calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. If the carrying
amount of goodwill exceeds its implied fair market value, an impairment loss is recognized. That loss is equal to the carrying amount of
goodwill that is in excess of its implied fair market value.
Impairment of Long-Lived Assets
Long-lived assets, such as fixed assets and purchased intangibles subject to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which
the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a
disposal group classified as held-for-sale are presented separately in the appropriate asset and liability sections of the balance sheet.
Derivative Financial Instruments and Hedging Activities
The Company uses derivative financial instruments to assist in the management of interest rate sensitivity and to modify the repricing,
maturity and option characteristics of certain assets and liabilities. In addition, the Company also offers an interest rate hedge program that
includes interest rate swaps to assist its customers in managing their interest rate risk profile. In order to eliminate the interest rate risk
associated with offering these products, the Company enters into derivative contracts with third parties to offset the customer contracts.
Derivative instruments are required to be measured at fair value and recognized as either assets or liabilities in the consolidated financial
statements. Fair value represents the payment the Company would receive or pay if the item were sold or bought in a current transaction. The
accounting for changes in fair value (gains or losses) of a hedged item is dependent on whether the related derivative is designated and
qualifies for “hedge accounting.” The Company assigns derivatives to one of these categories at the purchase date: cash flow hedge, fair value
hedge, or non-designated derivatives. An assessment of the expected and ongoing hedge effectiveness of any derivative designated a fair
value hedge or cash flow hedge is performed as required by the accounting standards. Derivatives are included in other assets and other
liabilities in the consolidated balance sheets. The fair value amounts recognized for derivative instruments and the fair value amounts
recognized for the right to reclaim or obligation to return cash collateral are not offset when represented under a master netting arrangement.
Generally, the only derivative instruments used by the Company have been interest rate swaps, forward currency contracts, and interest rate
caps.
Certain derivative financial instruments are not designated as cash flow or as fair value hedges for accounting purposes. These non-designated
derivatives are intended to provide interest rate protection on net interest income or noninterest income but do not meet hedge accounting
treatment. Customer accommodation interest rate swap contracts are not designated as hedging instruments. Changes in the fair value of these
instruments are recorded in interest income or noninterest income in the consolidated statements of income depending on the underlying
hedged item.
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Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. We evaluate the need for deferred tax asset valuation allowances based
on a more-likely-than-not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient positive taxable
income within the carryback or carryforward periods provided for in the laws for each applicable taxing jurisdiction. We consider the
following possible sources of taxable income: future reversal patterns of existing taxable temporary differences, future taxable income
exclusive of reversing temporary differences, taxable income in prior carryback years and the availability of qualified tax planning strategies.
The assessment regarding whether a valuation allowance is required or should be adjusted depends on all available positive and negative
factors including, but not limited to, nature, frequency, and severity of recent losses, duration of available carryforward periods, experience
with tax attributes expiring unused and near and medium term financial outlook. Because of the complexity of tax laws and regulations,
interpretation can be difficult and subject to legal judgment given specific facts and circumstances. It is possible that others, given the same
information, may at any point in time reach different reasonable conclusions regarding the estimated amounts of accrued taxes.
Stock-Based Compensation
Stock-based compensation is recognized as an expense for stock options, restricted stock awards, performance stock units, and restricted
stock units granted to employees, directors, and advisors in return for service. Equity classified awards are measured at the grant date fair
value using either an observable market value or a valuation methodology, and recognized over the requisite service period on a straight-line
basis. Forfeitures are recorded as they occur. A description of the Company’s stock-based employee compensation plan is described in “Note
16 - Stockholders’ Equity and Compensation Plans.”
Acquisitions and Divestitures
Acquisitions and business combinations are accounted for using the acquisition method of accounting. The assets and liabilities of the
acquired entities have been recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase
price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets.
The purchase price allocation process requires an estimation of the fair values of the assets acquired and the liabilities assumed. When a
business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the Company includes
an estimate of the acquisition-date fair value as part of the cost of the combination. To determine the fair values, the Company relies on third
party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The results
of operations of the acquired business are included in the Company’s consolidated financial statements from the date of acquisition. Merger-
related expenses include costs directly related to merger or acquisition activity and include legal and professional fees, system consolidation
and conversion costs, and compensation costs such as severance and retention incentives for employees impacted by acquisition activity. The
Company accounts for merger-related expenses in the periods in which the costs are incurred and the services are received.
For divestitures, the Company measures an asset (disposal group) classified as held-for-sale at the lower of its carrying value at the date the
asset is initially classified as held-for-sale or its fair value less costs to sell. The Company reports the results of operations of an entity or
group of components that either has been disposed of or held-for-sale as discontinued operations only if the disposal of that component
represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.
Any incremental direct costs incurred to transact the sale are allocated against the gain or loss on the sale. These costs would include items
like legal fees, title transfer fees, broker fees, etc. Any goodwill and intangible assets associated with the portion of the reporting unit to be
disposed of is included in the carrying amount of the business in determining the gain or loss on the sale.
78
Basic and Diluted Earnings Per Common Share
Basic earnings per common share data is calculated by dividing net income available to common shareholders by the weighted average
number of common shares outstanding during the period. Common shares outstanding include common stock and restricted stock awards
where recipients have satisfied the vesting terms. Diluted earnings per common share gives effect to all dilutive potential common shares
outstanding during the period using the treasury stock method.
Consolidated Statement of Comprehensive Income
The Consolidated Statement of Comprehensive Income includes the amount and the related tax impact that have been reclassified from
accumulated other comprehensive income to net income. The classification adjustment for unrealized loss/gain on sale of securities included
in net income has been recorded through the gain on sale of investment securities line item, within noninterest income, in the Company’s
Consolidated Statements of Operations.
Reclassifications
Certain amounts reported in prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on
net income or shareholders’ equity.
NOTE 2 - ACQUISITIONS & DIVESTITURES
The acquisitions noted below have been accounted for as business combinations using the acquisition method of accounting which requires
assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. Goodwill arising from the acquisitions consist
largely of the synergies and economies of scale expected from combining the operations into Enterprise. None of the goodwill recognized is
expected to be deductible for income tax purposes.
The following tables present the assets acquired and liabilities assumed. Additional adjustments may be recorded during the measurement
period specified in ASC 805, Business Combinations, as additional information becomes known.
Acquisition of Seacoast Commerce Banc Holdings
On November 12, 2020, the Company closed its acquisition of 100% of Seacoast and its wholly-owned subsidiary, Seacoast Commerce
Bank. Seacoast operated five full-service retail and commercial banking offices in California and Nevada, as well as SBA loan production
offices and deposit production offices in Arizona, California, Colorado, Illinois, Indiana, Massachusetts, Michigan, Nevada, Ohio, Oregon,
Texas, Utah, and Washington.
Seacoast shareholders received 0.5061 shares of EFSC common stock for each Seacoast common share and cash in lieu of any fractional
shares. In connection with the merger, Enterprise issued approximately 5.0 million shares of EFSC Common Stock valued at $33.56 per
share, which was the closing price of Enterprise common stock on November 12, 2020. The value of the transaction consideration was
approximately $169 million. The Company recognized $4.2 million of merger-related costs recorded in noninterest expense in the statement
of operations for the year ended December 31, 2020.
79
($ in thousands)
Assets acquired:
Cash and cash equivalents
Loans
Other investments
Fixed assets
Accrued interest receivable
Goodwill
Intangible assets
Deferred tax assets
Other assets
Total assets acquired
Liabilities assumed:
Deposits
PPPLF advances
Accrued interest payable
Other liabilities
Total liabilities assumed
Net assets acquired
Consideration paid:
Cash
Common stock
Total consideration paid
Goodwill
As Recorded by Seacoast
Adjustments
As Recorded by EFSC
$
$
$
$
$
63,744
1,160,602
12,100
925
4,511
35,395
1,513
12,009
35,025
1,325,824
1,081,034
86,096
185
25,211
1,192,526
133,298
$
$
$
$
$
—
29,839 (a)
—
(275) (b)
—
(35,395) (c)
1,168 (d)
(8,687) (e)
(437) (f)
(13,787)
(28) (f)
—
—
1,097 (f)
1,069
(14,856)
$
$
$
$
$
$
$
$
63,744
1,190,441
12,100
650
4,511
—
2,681
3,322
34,588
1,312,037
1,081,006
86,096
185
26,308
1,193,595
118,442
1,630
167,035
168,665
50,223
(a) Fair value adjustments based on the Company’s evaluation of the acquired loan portfolio, write-off of net deferred loan costs and elimination of the
allowance for loan losses recorded by Seacoast.
(b) Fair value adjustments based on the Company’s evaluation of the acquired premises and equipment.
(c) Adjustment to eliminate goodwill.
(d) Eliminate acquired intangibles and record the core deposit intangible asset on the acquired core deposit accounts. Amount to be amortized using a sum-of-
years digits method over a useful life of 10 years.
(e) Adjustment for deferred taxes.
(f) Other miscellaneous fair value adjustments.
The following table provides the unaudited pro forma information for the results of operations for the twelve months ended December 31,
2020 and 2019, as if the acquisition had occurred on January 1, 2019. The pro forma results combine the historical results of Seacoast with
the Company’s Consolidated Statements of Income, adjusted for the impact of the application of the acquisition method of accounting
including amortization and accretion of fair value adjustments. The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2019. No
assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset
dispositions. Only the acquisition-related expenses that have been incurred as of December 31, 2020 are included in net income in the table
below.
80
($ in thousands, except per share data)
Total revenue (net interest income plus noninterest income)
Net income
Diluted earnings per common share
Acquisition of Trinity Capital Corporation.
Pro Forma
Twelve months ended December 31,
2020
2019
$
381,914 $
93,918
3.00
355,500
86,888
2.79
On March 8, 2019, the Company closed its acquisition of 100% of Trinity and its wholly-owned subsidiary, LANB. Trinity operated six full-
service retail and commercial banking offices in Los Alamos, Santa Fe, and Albuquerque, New Mexico.
Trinity shareholders received cash consideration of $1.84 per share of Trinity common stock and 0.1972 shares of EFSC common stock per
share of Trinity common stock with cash in lieu of fractional shares. Aggregate consideration at closing was approximately 4.0 million shares
of EFSC common stock and $37.3 million cash paid to Trinity shareholders. Based on EFSC’s closing stock price of $43.07 on March 7,
2019, the overall transaction had a value of $209.2 million. The Company recognized $18.0 million and $1.3 million of merger-related costs
recorded in noninterest expense in the statement of operations for the years ended December 31, 2019 and 2018, respectively.
81
The following table presents the assets acquired and liabilities assumed of Trinity as of March 8, 2019.
($ in thousands)
Assets acquired:
Cash and cash equivalents
Interest-earning deposits greater than 90 days
Securities
Loans
Other real estate
Other investments
Fixed assets
Accrued interest receivable
Intangible assets
Deferred tax assets
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Subordinated debentures
FHLB advances
Accrued interest payable
Other liabilities
Total liabilities assumed
Net assets acquired
Consideration paid:
Cash
Common stock
Total consideration paid
Goodwill
As Recorded by Trinity
Adjustments
As Recorded by EFSC
$
$
$
$
$
13,899
100
428,715
705,057
5,284
6,673
27,586
3,997
—
10,708
35,045
1,237,064
1,081,151
26,806
6,800
370
5,842
1,120,969
116,095
$
$
$
$
$
—
—
(619) (a)
(20,743) (b)
(2,059) (c)
—
(300) (d)
—
23,066 (e)
(2,386) (f)
(1,484) (g)
(4,525)
36 (g)
(3,972) (g)
171 (g)
—
(827) (g)
(4,592)
67
$
$
$
$
$
$
$
$
13,899
100
428,096
684,314
3,225
6,673
27,286
3,997
23,066
8,322
33,561
1,232,539
1,081,187
22,834
6,971
370
5,015
1,116,377
116,162
37,275
171,885
209,160
92,998
(a) Fair value adjustments of the securities portfolio.
(b) Fair value adjustments based on the Company’s evaluation of the acquired loan portfolio, write-off of net deferred loan costs and elimination of the
allowance for loan losses recorded by Trinity.
(c) Fair value adjustment based on the Company’s evaluation of the acquired other real estate portfolio.
(d) Fair value adjustments based on the Company’s evaluation of the acquired premises and equipment.
(e) Record the core deposit intangible asset on the acquired core deposit accounts. Amount to be amortized using a sum-of-years digits method over a useful
life of 10 years.
(f) Adjustment for deferred taxes.
(g) Other miscellaneous fair value adjustments.
The following table provides the unaudited pro forma information for the results of operations for the twelve months ended December 31,
2019 and 2018, as if the acquisition had occurred on January 1, 2018. The pro forma results combine the historical results of Trinity with the
Company’s Consolidated Statements of Income, adjusted for the impact of the application of the acquisition method of accounting including
loan discount accretion, intangible assets amortization, and deposit and trust preferred securities premium accretion, net of taxes. The pro
forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been
obtained had the acquisition actually occurred on January 1, 2018. No assumptions have been applied to the pro forma results of operations
regarding possible revenue enhancements, expense efficiencies or
82
asset dispositions. Only the acquisition-related expenses that have been incurred as of December 31, 2019 are included in net income in the
table below.
($ in thousands, except per share data)
Total revenue (net interest income plus noninterest income)
Net income
Diluted earnings per common share
NOTE 3 - EARNINGS PER SHARE
Pro Forma
Twelve months ended December 31,
2019
2018
$
296,677 $
107,626
4.11
286,076
85,579
3.14
The following table presents a summary of earnings per common share data and amounts for the periods indicated.
($ in thousands, except per share data)
Net income
Weighted average common shares outstanding
Additional dilutive common stock equivalents
Weighted average diluted common shares outstanding
Basic earnings per common share:
Diluted earnings per common share:
2020
Year ended December 31,
2019
2018
74,384 $
92,739 $
26,954
35
26,989
2.76 $
2.76 $
26,045
114
26,159
3.56 $
3.55 $
89,217
23,100
189
23,289
3.86
3.83
$
$
$
For 2020 and 2019, common stock equivalents of approximately 156,000 and 21,000, respectively, were excluded from the earnings per share
calculation because their effect would have been anti-dilutive. For 2018, the amount was immaterial.
83
NOTE 4 - INVESTMENTS
The following table presents the amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale and held-to-
maturity:
($ in thousands)
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises
Obligations of states and political subdivisions
Agency mortgage-backed securities
Corporate debt securities
U.S. Treasury Bills
Total securities available-for-sale
Held-to-maturity securities:
Obligations of states and political subdivisions
Agency mortgage-backed securities
Corporate debt securities
Total securities held-to-maturity
Less: Allowance for credit losses
Total securities held-to-maturity, net
($ in thousands)
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises
Obligations of states and political subdivisions
Agency mortgage-backed securities
U.S. Treasury Bills
Total securities available-for-sale
Held-to-maturity securities:
Obligations of states and political subdivisions
Agency mortgage-backed securities
Corporate debt securities
Total securities held-to-maturity
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amortized Cost
$
$
$
$
14,978 $
335,271
506,703
14,750
10,980
882,682 $
248,324 $
112,742
126,993
488,059 $
449
$487,610
186 $
8,994
20,190
248
486
30,104 $
2,814 $
2,295
8,851
13,960 $
(3) $
(33)
(321)
—
—
(357) $
— $
(496)
—
(496) $
15,161
344,232
526,572
14,998
11,466
912,429
251,138
114,541
135,844
501,523
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized Cost
Fair Value
$
$
$
$
9,954 $
207,269
888,129
9,971
1,115,323 $
92 $
6,118
15,083
255
21,548 $
— $
(363)
(1,191)
—
(1,554) $
10,046
213,024
902,021
10,226
1,135,317
11,704 $
46,346
123,116
181,166 $
170 $
675
128
973 $
— $
—
(200)
(200) $
11,874
47,021
123,044
181,939
During 2020 and 2019, the Company transferred securities with a book value of $331.0 million and $116.3 million and fair value of
$352.6 million and $123.2 million, respectively, from available-for-sale to held-to-maturity. The Company believes the held-to-maturity
category is more consistent with the Company’s intent for these securities. The transfer of securities was made at fair value at the time of
transfer. The unamortized portion of the unrealized holding gain at the time of transfer is retained in accumulated other comprehensive
income and in the carrying value of held-to-maturity securities. Accordingly, the balance of held-to-maturity securities in the “Amortized
cost”
84
column in the table above includes a net unamortized unrealized gain of $25.6 million and $6.6 million at December 31, 2020 and 2019,
respectively. Such amounts are amortized over the remaining life of the securities.
At December 31, 2020, and 2019, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’
equity, other than the U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S.
Government-sponsored enterprises. Securities having a fair value of $525.8 million and $484.8 million at December 31, 2020, and
December 31, 2019, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law
or contract provisions.
The amortized cost and estimated fair value of debt securities at December 31, 2020, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. The weighted average life of the agency mortgage-backed securities is approximately 3 years.
($ in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Agency mortgage-backed securities
Available-for-sale
Held-to-maturity
Amortized Cost
Estimated
Fair Value
Amortized Cost
Estimated
Fair Value
$
$
12,048 $
21,977
19,711
322,243
506,703
882,682 $
12,240
22,629
20,105
330,883
526,572
912,429
$
$
— $
11,589
132,613
231,115
112,742
488,059 $
—
12,040
141,252
233,690
114,541
501,523
There were 30 available-for-sale securities and 73 available-for-sale and held-to-maturity securities in an unrealized loss position as of
December 31, 2020 and December 31, 2019, respectively, included in the following tables:
($ in thousands)
Obligations of U.S. Government-sponsored enterprises
Obligations of states and political subdivisions
Agency mortgage-backed securities
Less than 12 months
December 31, 2020
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
$
4,997 $
4,079
65,986
75,062 $
3 $
33
321
357 $
— $
—
—
— $
—
—
—
—
$
$
4,997 $
4,079
65,986
75,062 $
3
33
321
357
The following table presents a summary of available-for-sale and held-to-maturity investment securities in an unrealized loss position:
($ in thousands)
Obligations of states and political subdivisions
Agency mortgage-backed securities
Corporate debt securities
Less than 12 months
December 31, 2019
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
56,327
131,693
67,964
255,984 $
$
363
756
200
1,319 $
—
41,491
—
41,491 $
—
435
—
435
$
56,327
173,184
67,964
297,475 $
363
1,191
200
1,754
The unrealized losses at both December 31, 2020, and 2019, were primarily attributable to changes in market interest rates since the securities
were purchased. At December 31, 2020, the Company had not recorded an ACL on
85
available-for-sale securities. At December 31, 2019, the Company had not recognized an other-than-temporary impairment.
Accrued interest receivable on held-to-maturity debt securities totaled $3.6 million at December 31, 2020 and is excluded from the estimate
of expected credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions
and reasonable and supportable forecasts. At December 31, 2020, the ACL on held-to-maturity securities was $0.4 million.
The gross gains and losses realized from sales of available-for-sale investment securities were as follows:
($ in thousands)
Gross gains realized
Gross losses realized
Proceeds from sales
2020
$
December 31,
2019
2018
421 $
—
20,221
400 $
(449)
357,976
9
—
1,451
Other Investments
At December 31, 2020, and 2019, other investments totaled $48.8 million and $38.0 million, respectively. As a member of the FHLB system
administered by the Federal Housing Finance Agency, the Bank is required to maintain a minimum investment in capital stock with the
FHLB consisting of membership stock and activity-based stock. The FHLB capital stock of $10.8 million, and $15.7 million at December 31,
2020, and 2019, respectively, is recorded at cost, which represents redemption value, and is included in other investments in the consolidated
balance sheets. The remaining amounts in other investments primarily include various investments in SBICs, CDFIs, and the Company’s
investment in unconsolidated trusts used to issue preferred securities to third parties, see “Note 11 – Subordinated Debentures.”
86
NOTE 5 - LOANS
Below is a summary of loans by category at December 31, 2020 and 2019:
($ in thousands)
Commercial and industrial
Real estate loans:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Total real estate loans
Other
Loans, before unearned loan fees
Unearned loan fees, net
Loans, including unearned loan fees
*Includes $90.3 million of loans previously reported as PCI.
December 31, 2020
December 31, 2019*
$
$
3,100,299 $
1,589,419
1,498,408
546,686
319,179
3,953,692
187,083
7,241,074
(16,139)
7,224,935 $
2,361,157
1,299,884
697,437
457,273
366,261
2,820,855
134,941
5,316,953
(2,616)
5,314,337
PPP loans totaled $709.9 million at December 31, 2020, or $698.6 million net of unearned fees of $11.3 million. The loan balance includes a
net premium on acquired loans of $16.1 million at December 31, 2020, and a net discount of $36.0 million at December 31, 2019. At
December 31, 2020 loans of $2.5 billion were pledged to FHLB and the Federal Reserve Bank.
Following is a summary of activity for the years ended December 31, 2020 and 2019 of loans to executive officers and directors, or to entities
in which such individuals had beneficial interests as a shareholder, officer, or director. Such loans were made in the normal course of business
on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other
customers and did not involve more than the normal risk of collectibility.
($ in thousands)
Balance at beginning of year
New loans and advances
Payments and other reductions
Balance at end of year
December 31, 2020
December 31, 2019
$
$
5,475 $
2,013
(1,771)
5,717 $
17,169
1,376
(13,070)
5,475
87
A summary of the activity, by loan category, in the allowance for loan losses for 2018 and 2019, excluding the allowance on PCI loans, and
the ACL on loans for 2020 is as follows:
($ in thousands)
Balance at December 31, 2018
Allowance for loan losses:
Balance, beginning of year
Provision for loan losses
Charge-offs
Recoveries
Balance, end of year
Balance at December 31, 2019
Allowance for loan losses:
Balance, beginning of year
Provision for loan losses
Charge-offs
Recoveries
Balance, end of year
Balance at December 31, 2020
Allowance for credit losses:
Balance at December 31, 2019
PCI allowance at December 31, 2019
CECL adoption
PCD loans immediately charged off
Balance, beginning of year
Provision for loan losses
Initial allowance on acquired PCD loans
Charge-offs
Recoveries
Balance, end of year
Commercial and
industrial
CRE - investor
owned
CRE - owner
occupied
Construction and
land development
Residential real
estate
Other
Total
3,308 $
1,216
(313)
28
4,239 $
4,239 $
673
(58)
19
4,873 $
4,873 $
—
2,598
(57)
7,414 $
7,845
1,427
(30)
356
17,012 $
1,487 $
97
(56)
459
1,987 $
1,987 $
(237)
(54)
776
2,472 $
2,472 $
139
5,183
(217)
7,577 $
13,438
45
(31)
384
21,413 $
2,237 $
(583)
(546)
508
1,616 $
1,616 $
(330)
(667)
661
1,280 $
1,280 $
—
3,470
(1,401)
3,349 $
674
3
(408)
967
4,585 $
838 $
(20)
(167)
80
731 $
731 $
67
(382)
295
711 $
711 $
423
(84)
—
1,050 $
2,012
—
(391)
116
2,787 $
38,166
9,813
(7,976)
2,292
42,295
42,295
6,682
(8,594)
2,184
42,567
42,567
721
28,387
(1,680)
69,995
63,379
3,524
(6,739)
6,512
136,671
$
$
$
$
$
$
$
26,406 $
8,394
(6,894)
1,133
29,039 $
29,039 $
4,801
(6,882)
338
27,296 $
27,296 $
159
6,494
—
33,949 $
28,373
23
(5,381)
1,848
58,812 $
3,890 $
709
—
84
4,683 $
4,683 $
1,708
(551)
95
5,935 $
5,935 $
—
10,726
(5)
16,656 $
11,037
2,026
(498)
2,841
32,062 $
88
The ACL on sponsor finance loans, which is included in the categories above, represented $19.0 million as of December 31, 2020.
On January 1, 2020, the Company adopted the CECL methodology which added $28.4 million to the ACL on loans. Upon adoption,
$1.7 million of nonaccrual PCD loans with individual outstanding balances of less than $100,000 were immediately charged-off. Under the
CECL method, the Company recorded $63.4 million in provision for credit losses on loans in the twelve months ended December 31, 2020,
compared to $6.7 million in provision for loan losses in the prior year period (excluding the allowance release on PCI loans), under the
incurred loss method. The increase in the provision for credit losses in 2020 was primarily due to a change in economic forecasts from the
end of 2019 due to the COVID-19 pandemic.
The CECL methodology incorporates various economic scenarios. The Company utilizes three forecasts in the model, Moody’s baseline, a
stronger near-term growth upside and a moderate recession downside forecast. The Company weights these scenarios at 70%, 5%, and 25%,
respectively, which added approximately $5.9 million to the ACL over the baseline model. These forecasts incorporate an accommodative
monetary policy and the current impact of government stimulus. The Company has also recognized the risk posed by loans that have received
multiple deferrals of principal and interest payments, including the hospitality sector, by allocating additional reserves to those segments.
Some of the key risks to the forecasts that could result in future provision for credit losses are additional shutdowns and self-quarantines if
another significant wave of COVID hits, small-business bankruptcies occur at higher levels, or unemployment increases.
In addition to the CECL methodology, the Company incorporates qualitative adjustments into the ACL on loans to capture credit risks
inherent within the loan portfolio that are not captured in the DCF model. Included in these risks are 1) changes in lending policies and
procedures, 2) actual and expected changes in business and economic conditions, 3) changes in the nature and volume of the portfolio, 4)
changes in lending management, 5) changes in volume and the severity of past due loans, 6) changes in the quality of the loan review system,
7) changes in the value of underlying collateral, 8) the existence and effect of concentrations of credit and 9) other factors such as the
regulatory, legal and competitive environments and events such as natural disasters and pandemics. At December 31, 2020, the ACL on loans
included a qualitative adjustment of approximately $24.0 million. Of this amount, approximately $11.1 million was allocated to Sponsor
Finance loans due to their unsecured nature and the increased risk associated with payment deferrals in that portfolio.
The recorded investment in nonperforming loans by category at December 31, 2020 and 2019 is as follows:
($ in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Residential
Other
Total
Non-accrual
Restructured,
accruing
December 31, 2020
Loans over 90
days past due and
still accruing
interest
Total nonperforming
loans
$
18,158 $
3,482
$
130 $
21,770
Nonaccrual loans
with no allowance
8,316
$
9,579
2,940
4,112
29
34,818 $
$
—
—
77
—
3,559
$
—
—
—
—
130 $
9,579
2,940
4,189
29
38,507
$
716
6,024
3,190
18,246
89
($ in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Residential
Other
Total
December 31, 2019
Loans over 90
days past due
and still accruing
interest
Total nonperforming
loans
Restructured,
accruing
—
$
250 $
22,578
Nonaccrual loans
with no allowance
7,654
$
—
—
79
—
79
$
—
—
—
—
250 $
2,303
213
1,330
1
26,425
$
811
213
1,120
—
9,798
Non-accrual
$
22,328 $
2,303
213
1,251
1
26,096 $
$
The following table presents the amortized cost basis of collateral-dependent nonperforming loans by class of loan at December 31, 2020:
(in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Residential
Other
Total
Commercial Real Estate
$
8,316 $
9,579
2,940
—
—
20,835 $
$
Type of Collateral
Residential Real Estate
Blanket Lien
Other
— $
—
—
4,135
—
4,135 $
394 $
—
—
—
—
394 $
—
—
—
—
17
17
The recorded investment by category for loans restructured during the years ended December 31, 2020 and 2019 is as follows:
($ in thousands, except for number of loans)
Commercial and industrial
Real estate:
Commercial - owner occupied
Residential
Total
Year ended December 31, 2020
Year ended December 31, 2019
Number of
Loans
3
—
3
6
Pre-Modification
Outstanding
Recorded Balance
7,447
$
Post-Modification
Outstanding
Recorded Balance
7,447
$
—
372
7,819
$
—
372
7,819
$
Number of
Loans
—
1
2
3
Pre-Modification
Outstanding
Recorded Balance
—
$
Post-Modification
Outstanding
Recorded Balance
—
$
188
332
520
$
188
332
520
$
Restructured loans primarily resulted from interest rate concessions. As of December 31, 2020, the Company allocated an immaterial amount
in specific reserves to loans that have been restructured.
Loans restructured that subsequently defaulted during the year ended December 31, 2019 are as follows:
($ in thousands, except for number of loans)
Commercial and industrial
Total
Year ended December 31, 2019
Number of Loans
Recorded Balance
2
2
$
$
352
352
90
There were no restructured loans that subsequently defaulted during the year ended December 31, 2020.
In response to the COVID-19 pandemic, the Company has implemented short-term deferral programs allowing customers to primarily defer
payments for up to 90 days. Deferrals under the CARES Act or interagency guidance are not included above as troubled debt restructurings.
As of December 31, 2020, $687.8 million in loans have participated in the programs, including $340.0 million in loans deferring full principal
and interest payments and $347.8 million in loans deferring principal only. As of December 31, 2020, $63.0 million loans remain in a deferral
status. Interest of $4.1 million has been deferred and will be collected upon final maturity.
The aging of the recorded investment in past due loans by class and category at December 31, 2020 and 2019 is shown below:
($ in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Other
Total
($ in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Other
Total
30-89 Days
Past Due
90 or More
Days
Past Due
Total
Past Due
December 31, 2020
Current
Total
8,652 $
12,928 $
21,580 $
3,067,415 $
3,088,995
734
328
13
2,071
1,731
13,529 $
9,301
4,647
—
2,118
50
29,044 $
10,035
4,975
13
4,189
1,781
42,573 $
1,579,384
1,493,433
546,673
314,990
180,467
7,182,362 $
1,589,419
1,498,408
546,686
319,179
182,248
7,224,935
30-89 Days
Past Due
90 or More
Days
Past Due
Total
Past Due
December 31, 2019
Current
Total
5,679 $
8,212 $
13,891 $
2,331,932 $
2,345,823
321
562
308
4,689
81
11,640 $
1,492
213
—
595
—
10,512 $
1,813
775
308
5,284
81
22,152 $
1,261,168
677,747
449,072
349,908
132,069
5,201,896 $
1,262,981
678,522
449,380
355,192
132,150
5,224,048
$
$
$
$
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as
current financial information, historical payment experience, credit documentation, and current economic factors among other factors. This
analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
• Grades 1, 2, and 3 – Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and
capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry.
• Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and
sufficient liquidity and cash flow.
• Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash
flow.
• Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the
near future. Alternatively, this rating category may also include circumstances
91
where the borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating.
• Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or
influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated, due to strong collateral and/or guarantor support.
• Grade 8 – Substandard credits will include those borrowers characterized by significant losses and sustained downward trends in
balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may
exist and additional reserves may be warranted.
• Grade 9 – Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values
may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. The
borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on non-accrual.
92
The recorded investment by risk category of the loans by class at December 31, 2020, which is based upon the most recent analysis
performed is as follows:
(in thousands)
Commercial and industrial
Pass (1-6)
Watch (7)
Classified (8-9)
Total Commercial and
industrial
Commercial real estate-
investor owned
Pass (1-6)
Watch (7)
Classified (8-9)
Total Commercial real estate-
investor owned
Commercial real estate-owner
occupied
Pass (1-6)
Watch (7)
Classified (8-9)
Total Commercial real estate-
owner occupied
Construction real estate
Pass (1-6)
Watch (7)
Classified (8-9)
Total Construction real estate
Residential real estate
Pass (1-6)
Watch (7)
Classified (8-9)
Total residential real estate
Other
Pass (1-6)
Watch (7)
Classified (8-9)
Total Other
Term Loans by Origination Year
2020
2019
2018
2017
2016
Prior
Revolving
Loans
Converted to
Term Loans
Revolving
Loans
Total
$
1,402,276 $ 454,729 $
44,922
6,602
15,369
9,219
262,258 $
9,585
3,115
132,832 $
7,509
3,964
25,057 $
19,613
4,490
58,315 $
110
1,080
14,118 $
—
1,281
$
527,170
60,448
22,432
2,876,755
157,556
52,183
$
1,453,800 $ 479,317 $
274,958 $
144,305 $
49,160 $
59,505 $
15,399 $
610,050
$
3,086,494
$
$
$
$
$
$
$
$
$
$
481,867 $ 338,843 $
32,308
—
19,722
5,278
189,305 $
6,656
8,716
131,718 $
—
5,830
138,288 $
9,647
1,245
161,439 $
17,370
2,620
6,509 $
—
—
$
32,058
—
—
1,480,027
85,703
23,689
514,175 $ 363,843 $
204,677 $
137,548 $
149,180 $
181,429 $
6,509 $
32,058
$
1,589,419
419,142 $ 287,001 $
13,657
2,420
5,257
7,427
215,181 $
3,113
5,822
179,382 $
6,198
6,140
104,470 $
4,338
1,309
167,456 $
8,460
10,860
2,672 $
1,776
—
$
45,323
941
63
1,420,627
43,740
34,041
435,219 $ 299,685 $
224,116 $
191,720 $
110,117 $
186,776 $
4,448 $
46,327
$
1,498,408
223,069 $ 156,360 $
2,544
56
86
2,124
225,669 $ 158,570 $
45,460 $
34,179
503
80,142 $
18,579 $
11,632
1
30,212 $
11,539 $
—
—
11,539 $
9,144 $
2,499
31
11,674 $
—
—
—
—
$
$
57,059 $
210
571
57,840 $
27,907 $
840
733
29,480 $
17,718 $
526
121
18,365 $
17,138 $
—
14
17,152 $
27,443 $
514
898
28,855 $
92,657 $
1,603
3,181
97,441 $
1,172 $
287
—
1,459 $
43,526 $
—
—
43,526 $
28,195 $
1
18
28,214 $
30,074 $
8
19
30,101 $
9,646 $
—
13
9,659 $
5,641 $
—
—
5,641 $
17,027 $
2,637
17
19,681 $
$
—
—
8
8 $
28,880
—
—
28,880
66,902
511
253
67,666
40,779
1
4
40,784
$
$
$
$
$
$
493,031
50,940
2,715
546,686
307,996
4,491
5,771
318,258
174,888
2,647
79
177,614
In the table above, loan originations in 2020 and 2019 with a classification of watch or classified primarily represent renewals or
modifications initially underwritten and originated in prior years.
93
For certain loans, primarily credit cards, the Company evaluates credit quality based on the aging status.
The following table presents the recorded investment on loans based on payment activity:
(in thousands)
Commercial and industrial
Real estate:
Residential
Other
Total
Performing
December 31, 2020
Non Performing
Total
$
$
2,502 $
921
4,612
8,035 $
—
$
—
21
21
$
2,502
921
4,633
8,056
The recorded investment by risk category of the loans by class and category at December 31, 2019 is as follows:
($ in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Other
Total
*Excludes $90.3 million of loans previously accounted for as PCI
Pass (1-6)
Watch (7)
Classified (8 & 9)
Total*
2,151,084 $
124,718 $
70,021
$
2,345,823
December 31, 2019
1,242,569
643,276
437,134
348,246
132,096
4,954,405 $
17,572
28,773
12,140
4,450
3
187,656 $
2,840
6,473
106
2,496
51
81,987
$
1,262,981
678,522
449,380
355,192
132,150
5,224,048
$
$
The Company has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality
since origination. The carrying amount of those loans is as follows:
($ in thousands)
Par value of acquired loans
Allowance for credit losses
Non-credit premium
Purchase price of acquired loans
At November 12, 2020
137,693
(3,524)
928
135,097
$
$
94
NOTE 6 - LEASES
The Company has banking and limited-service facilities, datacenters, and certain equipment leased under agreements. Most of the leases
expire between 2021 and 2025 and include one or more renewal options of up to 5 years. One lease expires in 2031. All leases are classified
as operating leases.
($ in thousands)
Operating lease cost
Short-term lease cost
Total lease cost
For the twelve months ended
December 31, 2020
December 31, 2019
$
$
3,207 $
201
3,408 $
3,301
288
3,589
Payments on operating leases included in the measurement of lease liabilities during each of the twelve months ended December 31, 2020 and
2019 totaled $3.3 million. Right-of-use assets obtained in exchange for lease obligations totaled $1.6 million and $5.2 million during the
twelve months ended December 31, 2020 and 2019, respectively. The additions in 2020 were primarily from the Seacoast acquisition.
Supplemental balance sheet information related to leases was as follows:
($ in thousands)
Operating lease right-of-use assets, included in other assets
Operating lease liabilities, included in other liabilities
Operating leases
Weighted average remaining lease term
Weighted average discount rate
Maturities of operating lease liabilities were as follows:
($ in thousands)
Year
2021
2022
2023
2024
2025
Thereafter
Total operating lease liabilities, payments
Less: present value adjustment
Operating lease liabilities
December 31, 2020
December 31, 2019
As of
$
13,636
14,152
$
5 years
2.5 %
14,843
15,461
6 years
2.7 %
Amount
4,043
2,988
2,622
2,190
978
2,266
15,087
935
14,152
$
$
Lessor income was $1.8 million and $0.9 million during the twelve months ended December 31, 2020, and 2019, respectively.
95
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally
manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company
manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its
assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to
manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the
value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the
amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related
to the Company’s borrowings. The Company does not enter into derivative financial instruments for trading purposes.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate
movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management
strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the
Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company has
executed a series of cash flow hedges to fix the effective interest rate for payments due on $62.0 million of LIBOR-based junior subordinated
debentures to a weighted-average-fixed rate of 2.62%. Select terms of the hedges are as follows:
$ in thousands
Notional
$
$
$
$
15,465
14,433
18,558
13,506
Fixed Rate
Maturity Date
2.60 %
2.60 %
2.64 %
2.64 %
March 15, 2024
March 30, 2024
March 15, 2026
March 17, 2026
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in
accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged
transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to
interest expense as interest payments are paid on the Company’s variable-rate debt. During the next twelve months, the Company estimates
that an additional $1.5 million will be reclassified as an increase to interest expense. Concurrently with the repayment of $200 million of
variable-rate FHLB advances in the fourth quarter of 2020, the Company terminated two interest rate swaps with a notional value of
$200.0 million. A loss of $3.2 million was recognized on the termination of the swaps.
Non-designated Hedges
Derivatives not designated as hedges are not considered speculative and result from a service the Company provides to certain customers. The
Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those
interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company
minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the
strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized
directly in earnings as a component of other noninterest income.
96
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet
as of December 31, 2020 and December 31, 2019.
($ in thousands)
Derivatives Designated as Hedging Instruments
Derivative Assets
December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019
Derivative Liabilities
Notional Amount
Interest rate swap
$
61,962 $
61,962 $
— $
—
$
5,987 $
2,872
Derivatives not Designated as Hedging Instruments
Interest rate swap
$
1,026,016 $
749,819 $
28,703 $
11,055
$
28,980 $
11,875
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments that are
subject to offsetting as of December 31, 2020 and December 31, 2019. The gross amounts of assets or liabilities can be reconciled to the
tabular disclosure of fair value. The tabular disclosure of fair value provides the location that financial assets and liabilities are presented on
the Balance Sheet.
As of December 31, 2020
Gross Amounts Not Offset in the
Statement of Financial Position
Gross Amounts
Recognized
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Assets presented in
the Statement of
Financial Position
Financial
Instruments
Fair Value
Collateral Posted
Net Amount
28,703 $
—
$
28,703 $
2
$
—
$
28,701
34,967 $
—
$
34,967 $
2
$
34,903
$
271,081
—
271,081
—
271,081
62
—
As of December 31, 2019
Gross Amounts Not Offset in the
Statement of Financial Position
Gross Amounts
Recognized
Gross Amounts
Offset in the
Statement of
Financial Position
Net Amounts of
Assets presented in
the Statement of
Financial Position
Financial
Instruments
Fair Value
Collateral Posted
Net Amount
11,055 $
—
$
11,055 $
56
$
—
$
10,999
14,747 $
—
$
14,747 $
56
$
14,573
$
230,886
—
230,886
—
230,886
118
—
($ in thousands)
Assets:
Interest rate swap
Liabilities:
Interest rate swap
Securities sold under agreements to
repurchase
($ in thousands)
Assets:
Interest rate swap
Liabilities:
Interest rate swap
Securities sold under agreements to
repurchase
$
$
$
$
As of December 31, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment
for nonperformance risk, related to these agreements was $35.8 million. Further, the Company has minimum collateral posting thresholds
with certain of its derivative counterparties and has posted collateral of $36.5 million.
97
NOTE 8 - FIXED ASSETS
A summary of fixed assets at December 31, 2020 and 2019, is as follows:
($ in thousands)
Land
Buildings and leasehold improvements
Furniture, fixtures and equipment
Capitalized software
Less accumulated depreciation and amortization
Total fixed assets
December 31,
2020
2019
13,389 $
53,007
16,560
1,373
84,329
31,160
53,169 $
14,079
54,838
15,178
1,373
85,468
25,455
60,013
$
$
Depreciation and amortization of fixed assets included in noninterest expense amounted to $6.2 million, $5.7 million, and $3.5 million in
2020, 2019, and 2018, respectively.
NOTE 9 - GOODWILL AND INTANGIBLE ASSETS
The table below presents a summary of goodwill:
($ in thousands)
Goodwill, beginning of year
Additions from acquisition
Goodwill, end of year
The table below presents a summary of intangible assets:
($ in thousands)
Core deposit intangible, net, beginning of year
Additions from acquisition
Amortization
Core deposit intangible, net, end of year
Years ended December 31,
2020
2019
210,344 $
50,223
260,567 $
Years ended December 31,
2020
2019
26,076 $
2,681
(5,673)
23,084 $
117,345
92,999
210,344
8,553
23,066
(5,543)
26,076
$
$
$
$
Amortization expense on the core deposit intangibles was $5.7 million, $5.5 million, and $2.5 million for the years ended December 31, 2020,
2019, and 2018, respectively. The core deposit intangibles are being amortized over a 10-year period.
The following table reflects the amortization schedule for the core deposit intangible at December 31, 2020.
Year
2021
2022
2023
2024
2025
After 2025
Core Deposit Intangible ($ in
thousands)
$
$
5,295
4,517
3,840
3,162
2,485
3,785
23,084
98
NOTE 10 - DEPOSITS
Following is a summary of certificates of deposit maturities at December 31, 2020:
($ in thousands)
Less than 1 year
Greater than 1 year and less than 2 years
Greater than 2 years and less than 3 years
Greater than 3 years and less than 4 years
Greater than 4 years and less than 5 years
Greater than 5 years
$
$
Brokered
Customer
Total
— $
—
25,069
25,140
—
—
50,209 $
384,529 $
75,484
12,663
17,587
4,043
5,580
499,886 $
384,529
75,484
37,732
42,727
4,043
5,580
550,095
Certificates of deposit balances over the FDIC insurance limit of $250,000 were $169.5 million as of December 31, 2020.
Following is a summary of activity for the year ended December 31, 2020, for deposit accounts of executive officers and directors, or to
entities in which such individuals had beneficial interests as a shareholder, officer, or director.
($ in thousands)
Balance at beginning of year
Deposits
Withdrawals
Balance at end of year
December 31, 2020
9,763
2,441
(4,961)
7,243
$
$
The Company is a participant in the Promontory Interfinancial Network, a network that offers deposit placement services such as CDARS
and ICS, which offer products that qualify large deposits for FDIC insurance. At December 31, 2020, the Company had $7.3 million of
CDARS deposits and $71.7 million of ICS deposits. At December 31, 2020 and 2019, overdraft deposits of $1.0 million and $2.1 million,
respectively, were reclassified to loans.
99
NOTE 11 - SUBORDINATED DEBENTURES
The amounts and terms of each issuance of the Company’s subordinated debentures at December 31, 2020 and 2019 were as follows:
($ in thousands)
EFSC Clayco Statutory Trust I
EFSC Capital Trust II
EFSC Statutory Trust III
EFSC Clayco Statutory Trust II
EFSC Statutory Trust IV
EFSC Statutory Trust V
EFSC Capital Trust VI
EFSC Capital Trust VII
JEFFCO Stat Trust I (2)
JEFFCO Stat Trust II (2)
Trinity Capital Trust III (2)
Trinity Capital Trust IV
Trinity Capital Trust V (2)
Total junior subordinated debentures
5.75% Fixed-to-floating rate subordinated
notes
$
Amount
2020
2019
3,196 $
5,155
11,341
4,124
10,310
4,124
14,433
4,124
7,752
4,443
5,272
10,310
7,706
92,290
3,196
5,155
11,341
4,124
10,310
4,124
14,433
4,124
7,886
4,388
5,206
10,302
7,543
92,132
Maturity Date
December 17, 2033
June 17, 2034
December 15, 2034
September 15, 2035
December 15, 2035
September 15, 2036
March 30, 2037
December 15, 2037
February 22, 2031
March 17, 2034
September 8, 2034
November 23, 2035
December 15, 2036
Initial Call Date (1)
December 17, 2008
June 17, 2009
December 15, 2009
September 15, 2010
December 15, 2010
September 15, 2011
March 30, 2012
December 15, 2012
February 22, 2011
March 17, 2009
September 8, 2009
August 23, 2010
September 15, 2011
Interest Rate
Floats @ 3MO LIBOR + 2.85%
Floats @ 3MO LIBOR + 2.65%
Floats @ 3MO LIBOR + 1.97%
Floats @ 3MO LIBOR + 1.83%
Floats @ 3MO LIBOR + 1.44%
Floats @ 3MO LIBOR + 1.60%
Floats @ 3MO LIBOR + 1.60%
Floats @ 3MO LIBOR + 2.25%
Fixed @ 10.20%
Floats @ 3MO LIBOR + 2.75%
Floats @ 3MO LIBOR + 2.70%
Fixed @ 6.88%
Floats @ 3MO LIBOR + 1.65%
63,250
—
June 1, 2030
June 1, 2025
4.75% Fixed-to-floating rate subordinated
notes
Debt issuance costs
Total fixed-to-floating rate subordinated
notes
Total subordinated debentures and notes $
50,000
(1,903)
50,000
(874)
111,347
203,637 $
49,126
141,258
November 1, 2026
November 1, 2021
(1) Callable each quarter after initial call date.
(2) Purchase accounting adjustments are reflected in the balance and also impact the effective interest rate.
Fixed @ 5.75% until
June 1, 2025, then floats @ Benchmark
rate (3 month term SOFR) + 5.66%
Fixed @ 4.75% until
November 1, 2021, then floats @ 3MO
LIBOR + 3.387%
The Company has 13 unconsolidated statutory business trusts. These trusts issued preferred securities that were sold to third parties. The sole
purpose of the trusts was to invest the proceeds in junior subordinated debentures of the Company that have terms identical to the trust
preferred securities. The subordinated debentures, which are the sole assets of the trusts, are subordinate and junior in right of payment to all
present and future senior and subordinated indebtedness and certain other financial conditions of the Company. The Company fully and
unconditionally guarantees each trust’s securities obligations. Under current regulations, the trust preferred securities are included in tier 1
capital for regulatory capital purposes, subject to certain limitations.
The trust preferred securities are redeemable in whole or in part on or after their respective call dates. Mandatory redemption dates may be
shortened if certain conditions are met. The securities are classified as subordinated debentures in the Company’s consolidated balance sheets.
Interest on the subordinated debentures held by the trusts is recorded as interest expense in the Company’s consolidated statements of
operations. The Company’s investment of $2.9 million at December 31, 2020, in these trusts is included in other investments in the
consolidated balance sheets. The Company has fixed the interest rate on a portion of its junior subordinated debentures through a series of
interest rate swaps. For further discussion of the interest rate swaps and the corresponding terms, see “Note 7 - Derivative Financial
Instruments.”
100
On November 1, 2016, the Company issued $50 million of fixed-to-floating rate subordinated notes. The notes initially bear a fixed annual
interest rate of 4.75%, with interest payable semiannually in arrears on May 1 and November 1 of each year, commencing May 1,
2017. Commencing November 1, 2021, the interest rate on the notes resets quarterly to the three-month LIBOR rate plus a spread of 338.7
basis points, payable quarterly in arrears. On or after November 1, 2021, the Company will have the option to redeem the notes, in whole or
in part, at a redemption price equal to 100% of the principal amount of the subordinated notes to be redeemed plus accrued interest, subject to
applicable regulatory approval. The Company’s obligation to make payments of principal and interest on the notes is subordinate and junior
in right of payment to all of its senior debt. Current regulatory guidance allows for this subordinated debt to be treated as tier 2 regulatory
capital for the first five years of its term, subject to certain limitations, and then phased out of tier 2 capital pro rata over the next five years.
On May 21, 2020, EFSC issued $63.3 million of 5.75% fixed-to-floating rate subordinated notes due in 2030 in a public offering (the “2030
Notes”). From and including the date of issuance to, but excluding, June 1, 2025, the 2030 Notes will bear interest at a rate equal to 5.75% per
annum, payable semiannually in arrears on each June 1 and December 1. From and including June 1, 2025 to, but excluding, the maturity date
or the date of earlier redemption, the 2030 Notes will bear interest at a floating rate per annum equal to a benchmark rate (which is expected
to be three-month term SOFR (as defined in the Indenture, dated May 21, 2020, between EFSC and U.S. Bank National Association, as
trustee, and subsequent First Supplemental Indenture)), plus 566.0 basis points, payable quarterly in arrears on March 1, June 1, September 1
and December 1 of each year, commencing on September 1, 2025. Notwithstanding the foregoing, in the event that the benchmark rate is less
than zero, then the benchmark rate shall be deemed to be zero.
NOTE 12 - FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are collateralized by 1-4 family residential real estate loans, business loans, and certain commercial real estate loans. At
December 31, 2020 and 2019, the carrying value of the loans pledged to the FHLB of Des Moines was $1.4 billion and $1.6 billion,
respectively. The secured line of credit had availability of approximately $739.1 million at December 31, 2020.
The following table summarizes the type, maturity, and rate of the Company’s FHLB advances at December 31:
($ in thousands)
Non-amortizing fixed advance
Non-amortizing fixed advance
Total FHLB advances
Term
Less than 1 year
Greater than 1 year
2020
2019
Outstanding
Balance
Weighted Rate
Outstanding
Balance
Weighted Rate
$
$
—
50,000
50,000
— % $
1.56 %
1.56 % $
170,000
52,406
222,406
1.73 %
1.62 %
1.70 %
In August 2019, the Company entered into agreements totaling $50 million for convertible advances with a weighted average rate of 1.56%
that mature in 2024 and are currently puttable by the FHLB.
At December 31, 2020, the Company used $6.0 million of collateral value to secure confirming letters of credit for public unit deposits and
industrial development bonds.
NOTE 13 - OTHER BORROWINGS AND NOTES PAYABLE
Securities Sold Under Agreement to Repurchase
The Company enters into sales of securities under agreements to repurchase. The agreements are transacted with deposit customers and are
utilized as an overnight investment product. The amounts received under these agreements represent short-term borrowings and are reflected
as a liability in the consolidated balance sheets. The securities underlying these agreements are included in investment securities in the
Consolidated Balance Sheets. The Company has no control over the market value of the securities, which fluctuates due to market conditions.
101
However, the Company is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase
agreement price. The Company manages this risk by maintaining an unpledged securities portfolio that it believes is sufficient to cover a
decline in the market value of the securities sold under agreements to repurchase.
A summary of securities sold under agreements to repurchase is as follows:
($ in thousands)
Securities sold under agreement to repurchase
Average balance during the year
Maximum balance outstanding at any month-end
Average interest rate during the year
Average interest rate at December 31
December 31,
2020
2019
$
271,081
$
206,338
271,081
0.23 %
0.07 %
230,886
169,179
230,886
0.69 %
0.91 %
Federal Reserve Line
The Bank also has a line with the Federal Reserve Bank of St. Louis which provides additional liquidity to the Company. As of December 31,
2020, $0.9 billion was available under this line. This line is secured by a pledge of certain eligible loans aggregating $1.1 billion. There were
no amounts drawn on the Federal Reserve line of credit as of December 31, 2020.
Federal Reserve PPPLF
The Company acquired $86.1 million of Federal Reserve PPPLF funds from the Seacoast acquisition which were subsequently paid off in
November 2020.
Revolving Credit Line
In February 2016, the Company entered into a senior unsecured revolving credit agreement (the “Revolving Agreement”) with another bank.
The Revolving Agreement has a one-year term, maturing on February 22, 2021. It is in process of renewal and allows for borrowings up to
$25 million. The interest rate is the one-month LIBOR plus 125 basis points. The proceeds can be used for general corporate purposes. The
Revolving Agreement is subject to ongoing compliance with a number of customary affirmative and negative covenants as well as specified
financial covenants.
A summary of the amounts drawn on the Revolving Agreement is as follows:
($ in thousands)
Outstanding balance
Average balance during the year
Maximum balance outstanding at any month-end
Weighted average interest rate during the year
Average interest rate at December 31
The revolving credit line was not accessed in 2020.
102
December 31,
2019
$
—
323
2,000
4.61 %
—
Term Loan
In February 2019, the Company entered into a five year, $40.0 million unsecured term loan agreement (the “Term Loan”) with another bank
with the proceeds primarily used to fund the company’s cash portion of the acquisition of Trinity. The interest rate is the one-month LIBOR
plus 125 basis points.
A summary of the Term Loan is as follows:
($ in thousands)
Term Loan
Average balance during the year
Maximum balance outstanding at any month-end
Weighted average interest rate during the year
Average interest rate at December 31
December 31,
2020
2019
$
30,000
$
32,123
34,286
1.96 %
1.44 %
34,286
30,810
40,000
3.55 %
3.00 %
NOTE 14 - LITIGATION AND OTHER CONTINGENCIES
The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management
believes there are no such legal proceedings pending or threatened against the Company or its subsidiaries in the ordinary course of business,
directly, indirectly, or in the aggregate that, if determined adversely, would have a material adverse effect on the business, consolidated
financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
NOTE 15 - REGULATORY CAPITAL
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios (set forth in the
following table) of total, tier 1, and common equity tier 1 capital to risk-weighted assets, and of tier 1 capital to average assets. Management
believes, as of December 31, 2020 and 2019, that the Company met all capital adequacy requirements to which it is subject.
As of December 31, 2020 and 2019, the Bank was categorized as “well-capitalized” under the regulatory framework for prompt corrective
action. To be categorized as “well-capitalized” the Bank must maintain minimum total risk-based capital, tier 1 risk-based capital, common
equity tier 1 risk-based capital, and tier 1 leverage ratios as set forth in the table. In addition, the Company must maintain an additional CCB
above the regulatory minimum ratio requirements. The CCB is designed to insulate banks from periods of stress and impose constraints on
dividends, share repurchases and discretionary bonus payments when capital levels fall below prescribed levels.
The capital ratios are presented in the table below:
Common Equity Tier 1 Capital to Risk Weighted Assets
Tier 1 Capital to Risk Weighted Assets
Total Capital to Risk Weighted Assets
Leverage Ratio (Tier 1 Capital to Average Assets)
December 31, 2020
December 31, 2019
EFSC
Bank
EFSC
Bank
10.9 %
12.1 %
14.9 %
10.0 %
12.5 %
12.5 %
13.7 %
10.3 %
9.9 %
11.4 %
12.9 %
10.1 %
11.7 %
11.7 %
12.4 %
10.3 %
To Be Well-
Capitalized
Minimum Ratio
with CCB
6.5 %
8.0 %
10.0 %
5.0 %
7.0 %
8.5 %
10.5 %
4.0 %
103
NOTE 16 - SHAREHOLDERS’ EQUITY AND COMPENSATION PLANS
Shareholders’ Equity
Common Stock
At December 31, 2020 and 2019, the Company has reserved the following shares of its authorized but unissued common stock for possible
future issuance in connection with the following:
Outstanding performance units (maximum issuance)
Outstanding RSU’s
Outstanding options and appreciation rights
2018 Stock Incentive Plan
Non-Management Director Plan
2018 Employee Stock Purchase Plan
Total
December 31, 2020
125,176
157,428
—
339,691
86,616
635,890
1,344,801
December 31, 2019
73,172
117,369
28,300
521,573
96,031
694,085
1,530,530
Common Stock Repurchase Plan
In May 2015, the Company’s board of directors authorized the repurchase of up to two million shares of the Company’s common stock. The
repurchases may be made in open market or privately negotiated transactions and the stock repurchase program will remain in effect until
fully utilized or until modified, superseded or terminated. At December 31, 2020, there were 95,907 shares available for repurchase under the
plan.
Preferred Stock
The Company has 5,000,000 shares of authorized preferred stock with a par value of $0.01. The Board of Directors has the right to set for
each series of preferred stock, subject to the laws of the State of Delaware, the dividend rate, conversion and redemption terms, voting rights
and liquidation preferences, among others. At December 31, 2020 and 2019 there were no shares of preferred stock outstanding.
Dividends
The Company’s ability to pay dividends to its shareholders is generally dependent upon the payment of dividends by the Bank to the parent
company. The Bank cannot pay dividends to the extent it would be deemed undercapitalized by the FDIC after making such dividend.
Dividends on the Company’s capital stock are prohibited under the terms of the junior subordinated debenture agreements, see “Note 11 -
Subordinated Debentures,” if the Company is in continuous default on its payment obligations to the capital trusts, has elected to defer
interest payments on the debentures or extends the interest payment period. At December 31, 2020, the Company was not in default on any of
the junior subordinated debenture issuances.
104
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss) after-tax by component:
($ in thousands)
Balance, December 31, 2017
Net change
Adjustment for change in accounting policies
Balance, December 31, 2018
Net change
Transfer from available-for-sale to held-to-maturity
Balance, December 31, 2019
Net change
Transfer from available-for-sale to held-to-maturity
Balance, December 31, 2020
$
Net Unrealized Gain
(Loss) on Available-
for-Sale Debt
Securities
Unamortized Gain
(Loss) on Held-to-
Maturity Securities
Net Unrealized Loss
on Cash Flow
Hedges
Total
$
(3,622) $
(196) $
— $
(4,633)
(792)
(9,047)
29,226
(5,202)
14,977
23,627
(16,284)
22,320 $
3
(42)
(235)
(33)
5,202
4,934
(1,910)
16,284
19,308 $
—
—
—
(2,162)
—
(2,162)
(2,346)
—
(4,508) $
(3,818)
(4,630)
(834)
(9,282)
27,031
—
17,749
19,371
—
37,120
The following table presents the pre-tax and after-tax changes in the components of other comprehensive income:
2020
2019
2018
Tax effect After-tax
Pre-tax
Tax effect After-tax
Pre-tax
Tax effect After-tax
Pre-tax
$ 31,798 $
($ in thousands)
Change in unrealized gain (loss) on
available-for-sale debt securities
Reclassification adjustment for realized
(gain) loss on sale of available-for-sale
debt securities(a)
Reclassification of (gain) loss on held-to-
maturity securities(b)
Change in unrealized loss on cash flow
hedges arising during the period(b)
Reclassification of loss on cash flow
hedges(b)
Total other comprehensive income (loss) $ 25,724 $
(2,537)
(7,898)
4,782
(421)
7,854 $
23,944
$
38,764 $
9,575 $
29,189
$
(6,143) $
(1,517) $
(4,626)
(104)
(317)
(627)
(1,910)
49
(44)
12
(11)
37
(33)
(1,951)
(5,947)
(3,004)
(742)
(2,262)
(9)
4
—
(2)
1
—
(7)
3
—
1,181
6,353 $
3,601
19,371
133
35,898 $
$
33
8,867 $
100
27,031
—
(6,148) $
—
(1,518) $
—
(4,630)
$
(a)
(b)
The pre-tax amount is reported in noninterest income/expense in the Consolidated Statements of Operations.
The pre-tax amount is reported in interest income/expense in the Consolidated Statements of Operations, except for a $3.2 million termination fee in 2020
recognized in noninterest expense.
105
Compensation Plans
The Company has adopted share-based compensation plans to reward and provide long-term incentive for directors and key employees of the
Company including its subsidiaries. These plans provide for the granting of stock, stock options, stock-settled stock appreciation rights
(“SSARs”), and restricted stock units (“RSUs”), and may contain performance terms as designated by the Company’s Board of Directors
upon the recommendation of the Compensation Committee of the Board. The Company uses authorized and unissued shares to satisfy share
award exercises.
The total excess income tax benefit for share-based compensation arrangements was $0.2 million, $0.5 million, and $1.6 million for the years
ended December 31, 2020, 2019, and 2018, respectively. At December 31, 2020, there was $5.0 million of total unrecognized compensation
cost related to unvested share-based compensation awards. The cost is expected to be recognized over a weighted-average period of 2 years.
The following table summarizes share-based compensation expense:
($ in thousands)
Performance stock units
Restricted stock units
Employee stock purchase plan
Total share-based compensation expense
2020
2019
2018
$
$
1,097 $
2,613
468
4,178 $
1,699 $
1,969
364
4,032 $
2,067
1,211
174
3,452
Performance Units
The Company has entered into long-term incentive agreements with certain key employees. These awards are conditioned on certain
performance criteria and market criteria measured against a group of peer banks over a three-year period for each grant. The awards contain
minimum (threshold), target, and maximum (exceptional) performance levels. In the event of a change in control, as defined in the plan, the
awards will vest at a minimum of the target level. The amount of the awards is determined at the end of the three year vesting and
performance period. In January 2021, the Company awarded 23,251 shares to employees upon completion of the 2018-2020 performance
cycle. In January 2020, the Company awarded 62,649 shares to employees upon completion of the 2017-2019 performance cycle. In January
2019, the Company awarded 99,308 shares to employees upon completion of the 2016-2018 performance cycle.
Information related to the outstanding grants at December 31, 2020 is shown below:
($ in thousands)
Shares issuable at target
Maximum shares issuable
Unrecognized compensation cost
Weighted average grant date fair value
2019 - 2021 Cycle
2020 - 2022 Cycle
20,860
41,720
366 $
47.46
26,002
52,004
704
38.09
$
106
Restricted Stock Units
The Company awards nonvested stock, in the form of RSUs to employees. RSUs generally are subject to continued employment and
generally vest ratably over two to five years. Shares issued to the Bank’s directors for compensation are not subject to vesting requirements.
Vesting is accelerated upon a change in control or the employee meeting certain retirement criteria. RSUs do not carry voting or dividend
rights until vested. Sales of the units are restricted prior to vesting. Various information related to the RSUs is shown below.
($ in thousands)
Total fair value at vesting date
Total unrecognized compensation cost for nonvested stock units
Expected years to recognize unearned compensation
2020
2019
2018
$
1,702 $
3,899
1.9 years
1,067 $
3,417
1.9 years
1,544
2,175
2.0 years
A summary of the status of the Company’s RSU awards as of December 31, 2020 and changes during the year then ended is presented below
Outstanding at December 31, 2019
Granted
Vested
Forfeited
Outstanding at December 31, 2020
Shares
Weighted Average
Grant Date
Fair Value
117,369 $
88,759
(44,351)
(4,349)
157,428 $
45.86
39.63
45.68
44.24
42.44
Employee Stock Options and Stock-settled Stock Appreciation Rights
In determining compensation cost for stock options and SSARs, the Black-Scholes option-pricing model is used to estimate the fair value on
date of grant. There were no grants of employee stock options or SSARs during the years ended December 31, 2020, 2019, or 2018.
Stock options have been granted to key employees with exercise prices equal to the market price of the Company’s common stock at the date
of grant and 10-year contractual terms. Stock options have a vesting schedule of three to five years. The SSARs are subject to continued
employment, have a 10-year contractual term and vest ratably over five years. Neither stock options nor SSARs carry voting or dividend
rights until exercised. At December 31, 2020, there was no remaining unrecognized compensation expense related to stock options and
SSARs and all outstanding awards are vested. Various information related to the stock options and SSARs is shown below.
($ in thousands)
Intrinsic value of option/SSAR exercises on date of exercise
2020
2019
2018
$
597 $
407 $
2,469
Following is a summary of the SSAR activity for 2020.
($ in thousands, except per share data)
Outstanding at December 31, 2019
Exercised
Outstanding at December 31, 2020
Shares
28,300 $
(28,300)
—
Weighted
Average
Exercise Price
10.14
10.14
N/A
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan (“ESPP”) in 2018 to provide its eligible employees with an opportunity to purchase
common stock through accumulated contributions. The ESPP provides for shares to be
107
purchased at 85% of the lesser of the stock price at the enrollment date or the exercise date. The maximum number of shares of common
stock available for sale under the ESPP is 750,000. In 2020, 2019, and 2018, employees purchased 58,195, 41,116, and 14,799 shares,
respectively.
Stock Plan for Non-Management Directors
The Company has adopted a Stock Plan for Non-Management Directors, which provides for issuing up to 200,000 shares of common stock to
non-management directors as compensation in lieu of cash. At December 31, 2020, there were 80,130 shares of stock available for grant
under the Stock Plan for Non-Management Directors, exclusive of 6,486 shares to be issued upon deferral release.
Various information related to the Director Plan is shown below.
Shares granted
Weighted average fair value
2020
2019
2018
$
15,901
30.28 $
11,382
41.63 $
11,750
50.74
401(k) Plan
The Company has a 401(k) savings plan which covers substantially all full-time employees over the age of 21 and matches 100% of the first
6% of employee contributions. The amount charged to expense for the Company’s contributions to the plan was $3.8 million, $3.2 million
and $2.8 million for 2020, 2019, and 2018, respectively.
Deferred Compensation Plan
The Company’s Deferred Compensation Plan permits certain executives to participate and defer up to 25% of their base salary and/or up to
100% of their eligible bonus for a plan year. Participants make an irrevocable election when they elect to participate for a plan year to receive
the vested account balance following their retirement date, or at a future date not less than five years after the beginning of the plan year. At
December 31, 2020, the Company had assets and liabilities of $3.6 million and $4.9 million, respectively, related to the Deferred
Compensation Plan.
NOTE 17 - INCOME TAXES
The components of income tax expense for the years ended December 31, are as follows:
($ in thousands)
Current:
Federal
State and local
Total current
Deferred:
Federal
State and local
Total deferred
Total income tax expense
2020
Year ended December 31,
2019
2018
25,132 $
5,009
30,141
(10,651)
(1,927)
(12,578)
17,563 $
15,470 $
2,027
17,497
4,262
1,538
5,800
23,297 $
9,621
2,432
12,053
2,812
495
3,307
15,360
$
$
108
A reconciliation of expected income tax expense, computed by applying the statutory federal income tax rate in 2020, 2019, and 2018 to
income before income taxes and the amounts reflected in the consolidated statements of operations is as follows:
($ in thousands)
Income tax expense at statutory rate
Increase (reduction) in income tax resulting from:
Tax-exempt interest income, net
State and local income taxes, net
Bank-owned life insurance, net
Non-deductible expenses
Tax benefit (expense) of LIHTC investments, net
Excess tax benefits
Federal tax credits
Subsidiary dividend timing election
Non-taxable donation to charitable foundation
Other, net
Total income tax expense
2020
Year ended December 31,
2019
2018
$
19,309 $
24,368 $
(2,010)
3,254
(778)
637
(444)
(175)
(1,327)
—
—
(903)
17,563 $
(962)
2,816
(628)
749
(278)
(526)
(913)
—
(420)
(909)
23,297 $
$
21,961
(506)
2,423
(452)
294
(50)
(1,631)
(4,627)
(2,728)
—
676
15,360
The net amount recognized as a component of tax expense for tax credits, other tax benefits, and amortization from low-income housing tax
credit (“LIHTC”) investments recognized per the table above was $0.4 million for the year ended December 31, 2020. The net amount
recognized as a benefit component of income tax expense per the table above was $0.3 million for the year ended December 31, 2019, and
$0.1 million for the year ended December 31, 2018. As of December 31, 2020 and 2019, the carrying value of the investments related to low-
income housing tax credits was $4.2 million and $4.0 million, respectively. No impairment losses have been recognized from forfeiture or
ineligibility of tax credits or other circumstances during the life of any of the investments.
109
A net deferred income tax asset of $29.8 million and $14.4 million is included in other assets in the consolidated balance sheets at
December 31, 2020 and 2019, respectively. The tax effect of temporary differences that gave rise to significant portions of the deferred tax
assets and deferred tax liabilities is as follows:
($ in thousands)
Deferred tax assets:
Allowance for loan losses
Acquired loans
Loans held-for-sale
Other real estate
Deferred compensation
Accrued compensation
Net operating losses and tax credits
Other deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Acquired loans
Unrealized gains on securities
Intangible assets
Other deferred tax liabilities
Total deferred tax liabilities
Net deferred tax asset before valuation allowance
Less: valuation allowance
Net deferred tax asset
Year ended December 31,
2020
2019
$
$
34,031 $
—
8,058
896
2,585
5,391
6,460
3,086
60,507
3,413
12,189
7,800
4,369
27,771
32,736
2,932
29,804 $
10,692
9,722
—
657
2,462
1,607
7,066
791
32,997
—
5,847
7,432
2,407
15,686
17,311
2,932
14,379
As part of the Trinity Capital Corporation acquisition in 2019, the company acquired net operating loss, tax credit, and capital loss deferred
tax assets. Net operating losses originated in the years 2012, 2014-2017, and 2019 and will expire in the years between 2032-2037. Tax credit
carryforwards originated in years 2010-2015 and will expire in the years between 2030-3035. Capital losses originated in 2015, 2016, & 2018
and will expire in the years between 2021-2023.
A valuation allowance is provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. In
2019, as part of the Trinity Capital Corporation acquisition, the company acquired net operating loss, tax credit, and capital loss deferred tax
assets. The company determined that it was more likely than not that some of the assets would not be realized. As such, the company
recorded a $2.9 million valuation allowance as of December 31, 2020 and 2019.
The Company and its subsidiaries file income tax returns in the federal jurisdiction and in twenty-nine states. The Company is no longer
subject to federal, state or local income tax audits by tax authorities for years before 2017, with the exception of 2016 being an open year by
one state taxing authority. Net operating losses generated prior to 2016 that are utilized going forward would still be subject to examination.
As of December 31, 2020, the gross amount of unrecognized tax benefits was $3.2 million and the total amount of net unrecognized tax
benefits that would impact the effective tax rate, if recognized, was $3.1 million. As of December 31, 2019 and 2018, the total amount of the
net unrecognized tax benefits that would impact the effective tax rate, if recognized, was $1.1 million and $0.9 million, respectively. The
Company believes it is reasonably possible that the gross amount of unrecognized benefits will be reduced by approximately $0.3 million as a
result of a lapse of statute of limitations in the next 12 months.
110
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and classifies such interest and
penalties in the liability for unrecognized tax benefits. The amount accrued for interest and penalties was $0.9 million as of December 31,
2020, and was not significant for 2019 and 2018.
The activity in the gross liability for unrecognized tax benefits was as follows:
($ in thousands)
Balance at beginning of year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Settlements or lapse of statute of limitations
Balance at end of year
2020
2019
2018
$
$
1,497 $
395
1,556
(291)
3,157 $
1,301 $
401
62
(267)
1,497 $
1,244
367
50
(360)
1,301
NOTE 18 - COMMITMENTS
Long-term Lease Commitments
See “Note 6 – Leases” in this report for information regarding the Company’s long-term lease commitments.
Off-balance-Sheet Commitments
The Company issues financial instruments in the normal course of the business of meeting the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters of credit is not more than the contractual amount of these
instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included
on its consolidated balance sheets.
The contractual amounts of off-balance-sheet financial instruments as of December 31, 2020, and December 31, 2019, are as follows:
(in thousands)
Commitments to extend credit
Letters of credit
State tax credits
Low-income housing tax credits
Limited partnership commitments
December 31, 2020
December 31, 2019
$
1,946,068 $
50,971
24,473
—
23,400
1,469,413
47,969
28,035
704
20,829
There was an insignificant amount of unadvanced commitments on impaired loans at December 31, 2020 and December 31, 2019. Other
liabilities include approximately $5.7 million for estimated losses attributable to unadvanced commitments at December 31, 2020.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may
require payment of a fee. Of the total commitments to extend credit at December 31, 2020, and December 31, 2019, $160.6 million and
$144.8 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon
or may be revoked, the total commitment amounts do not necessarily represent future cash obligations. The Company evaluates each
111
customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension
of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory,
premises and equipment, and real estate.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These
letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit
is essentially the same as the risk involved in extending loans to customers. The approximate remaining term of letters of credit range from 1
month to 4 years at December 31, 2020.
The Company also has off-balance sheet commitments for purchases of state tax credits, low-income housing tax credits, and commitments
for various capital raises for SBICs.
NOTE 19 - FAIR VALUE MEASUREMENTS
The fair value of an asset or liability is the exchange price that would be received to sell that asset or paid to transfer that liability in an
orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or
liability. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC
Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for valuation inputs that gives the highest priority to
quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as
follows:
•
•
•
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets
or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest
rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by
correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about
the assumptions that market participants would use in pricing the assets or liabilities.
112
Fair value on a recurring basis
The following table summarizes financial instruments measured at fair value on a recurring basis as of December 31, 2020 and 2019,
segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
($ in thousands)
Assets
Securities available-for-sale
Obligations of U.S. Government-sponsored enterprises
Obligations of states and political subdivisions
Residential mortgage-backed securities
Corporate debt securities
U.S. Treasury Bills
Total securities available-for-sale
Derivative financial instruments
Total assets
Liabilities
Derivative financial instruments
Total liabilities
($ in thousands)
Assets
Securities available-for-sale
Obligations of U.S. Government-sponsored enterprises
Obligations of states and political subdivisions
Residential mortgage-backed securities
U.S. Treasury Bills
Total securities available-for-sale
Other investments
Derivative financial instruments
Total assets
Liabilities
Derivative financial instruments
Total liabilities
December 31, 2020
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
Significant
Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
$
$
$
$
—
—
—
—
—
—
—
—
—
—
$
$
$
$
15,161 $
344,232
526,572
14,998
11,466
912,429
28,703
941,132
$
34,967 $
34,967 $
December 31, 2019
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
Significant
Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
—
—
—
—
—
—
—
—
—
—
$
$
$
$
10,046 $
213,024
902,021
10,226
1,135,317
—
11,055
1,146,372 $
14,747 $
14,747 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
$
$
$
15,161
344,232
526,572
14,998
11,466
912,429
28,703
941,132
34,967
34,967
Total Fair
Value
10,046
213,024
902,021
10,226
1,135,317
—
11,055
1,146,372
14,747
14,747
•
Securities available-for-sale. Securities classified as available-for-sale are reported at fair value utilizing Level 2 and Level 3 inputs.
Fair values for Level 2 securities are based upon dealer quotes, market spreads, the U.S. Treasury yield curve, trade execution data,
market consensus prepayment speeds, credit information and the bond’s terms and conditions at the security level. Changes in fair
value are recognized through accumulated other comprehensive income.
• Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains counterparty quotations to value its
interest rate swaps and caps. In addition, the Company validates the counterparty quotations with third party valuation sources.
Derivatives with negative fair values are
113
included in Other liabilities in the consolidated balance sheets. Derivatives with positive fair value are included in Other assets in the
consolidated balance sheets. Changes in the fair value of client-related derivative instruments are recognized through net income. For
the years ended December 31, 2020 and 2019, the gains and losses offset each other due to the Company’s hedging of the client
swaps with other bank counterparties.
Fair value on a non-recurring basis
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at
fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of
impairment).
•
Impaired loans. Impaired loans are included as Portfolio loans on the Company’s consolidated balance sheets with amounts specifically
reserved for credit impairment in the Allowance for loan losses. On a quarterly basis, fair value adjustments are recorded on impaired
loans to account for (1) partial write-downs that are based on the current appraised or market-quoted value of the underlying collateral or
(2) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been
obtained are located in areas where comparable sales data is limited, outdated, or unavailable. In addition, the Company may adjust the
valuations based on other relevant market conditions or information. Accordingly, fair value estimates, including those obtained from real
estate brokers or other third-party consultants, for collateral-dependent impaired loans are classified in Level 3 of the valuation hierarchy.
• Other Real Estate. These assets are reported at the lower of the loan carrying amount at foreclosure or fair value. Fair value is based on
third party appraisals of each property and the Company’s judgment of other relevant market conditions. These are considered Level 3
inputs.
The following table presents financial instruments and non-financial assets measured at fair value on a non-recurring basis as of
December 31, 2020 and 2019.
(1)
Total Fair Value
(1)
Quoted Prices in Active
Markets for
Identical
Assets
(Level 1)
December 31, 2020
(1)
Significant
Other
Observable
Inputs
(Level 2)
(1)
Significant
Unobservable
Inputs
(Level 3)
Total losses for the year
ended
December 31, 2020
1,247 $
3,600
4,847 $
—
—
—
$
$
—
—
—
$
$
1,247 $
3,600
4,847 $
4,486
1,000
5,486
(1)
Total Fair Value
(1)
Quoted Prices in Active
Markets for
Identical
Assets
(Level 1)
December 31, 2019
(1)
Significant
Other
Observable
Inputs
(Level 2)
(1)
Significant
Unobservable
Inputs
(Level 3)
Total losses for the year
ended
December 31, 2019
2,506 $
7,450 $
—
—
$
$
—
—
$
$
2,506 $
7,450 $
2,687
2,687
$
$
$
$
($ in thousands)
Impaired loans
Other real estate
Total
($ in thousands)
Impaired loans
Total
(1) The amounts represent balances measured at fair value during the period and still held as of the reporting date.
Impaired loans are reported at the fair value of the underlying collateral. Fair values for impaired loans are obtained from current appraisals
by qualified licensed appraisers or independent valuation specialists. Other real estate owned is adjusted to fair value upon foreclosure of the
underlying loan. Subsequently, foreclosed assets are carried
114
at the lower of carrying value or fair value less costs to sell. Fair value of other real estate is based upon the current appraised values of the
properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions.
Carrying amount and fair value at December 31, 2020 and 2019
Following is a summary of the carrying amounts and fair values of the Company’s financial instruments on the consolidated balance sheets at
December 31, 2020 and 2019. This summary excludes certain financial assets and liabilities for which carrying value approximates fair value
and financial instruments that are recorded at fair value on a recurring basis disclosed above. Financial instruments for which carrying values
approximate fair value include cash and due from banks, federal funds sold, interest bearing deposits, accrued interest receivable/payable,
demand, savings and money market deposits.
($ in thousands)
Balance sheet assets
Securities held-to-maturity
Other investments
Loans held-for-sale
Loans, net
State tax credits, held-for-sale
Balance sheet liabilities
Certificates of deposit
Subordinated debentures and notes
FHLB advances
Other borrowings
Carrying
Amount
December 31, 2020
Estimated fair
value
487,610 $
48,764
13,564
7,088,264
36,853
501,523
48,764
13,564
7,067,562
39,925
550,095 $
203,637
50,000
301,081
553,946
192,889
51,871
301,081
$
$
Level
Level 2
Level 2
Level 2
Level 3
Level 3
Level 3
Level 2
Level 2
Level 2
$
$
Carrying
Amount
December 31, 2019
Estimated fair
value
181,166 $
38,044
5,570
5,271,049
36,802
181,939
38,044
5,570
5,205,651
39,046
826,447 $
141,258
222,406
265,172
825,203
130,985
221,402
265,172
Level
Level 2
Level 2
Level 2
Level 3
Level 3
Level 3
Level 2
Level 2
Level 2
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined
with precision. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions
used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and
judgment. Management evaluates its estimates and assumptions on an ongoing basis using experience and other factors, including the current
economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions
when facts and circumstances dictate. Decreasing real estate values, illiquid credit markets, volatile equity markets, and declines in consumer
spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be
determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing
changes in the economic environment will be reflected in the financial statement in future periods. In addition, these estimates do not reflect
any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial
instrument. Fair value estimates are based on existing on-balance and off-balance-sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not
been considered in many of the estimates.
115
NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets
($ in thousands)
Cash
Investment in Bank
Investment in nonbank subsidiaries
Other assets
Total assets
Assets
Liabilities and Shareholders’ Equity
Subordinated debentures and notes
Notes payable
Accounts payable and other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
December 31,
2020
2019
75,475 $
1,200,689
9,778
35,108
1,321,050 $
203,637 $
30,000
8,439
1,078,974
1,321,050 $
21,955
977,959
9,795
37,905
1,047,614
141,258
34,286
4,885
867,185
1,047,614
$
$
$
$
Condensed Statements of Operations
2020
Year ended December 31,
2019
2018
($ in thousands)
Income:
Dividends from Bank
Dividends from nonbank subsidiaries
Other
Total income
Expenses:
Interest expense-subordinated debentures and notes
Interest expense-notes payable
Other expenses
Total expenses
Income before taxes and equity in undistributed earnings of subsidiaries
Income tax benefit
$
37,000 $
1,400
483
38,883
60,000 $
1,500
663
62,163
9,885
705
6,946
17,536
21,347
3,448
7,507
1,182
6,936
15,625
46,538
3,478
30,000
1,200
1,784
32,984
5,798
62
7,087
12,947
20,037
3,482
23,519
65,698
89,217
Net income before equity in undistributed earnings of subsidiaries
24,795
50,016
Equity in undistributed earnings of subsidiaries
Net income and comprehensive income
$
49,589
74,384 $
42,723
92,739 $
116
($ in thousands)
Cash flows from operating activities:
Condensed Statements of Cash Flows
2020
Year ended December 31,
2019
2018
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
$
74,384 $
92,739 $
89,217
Share-based compensation
Net income of subsidiaries
Dividends from subsidiaries
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired
Purchases of other investments
Proceeds from distributions on other investments
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of subordinated notes
Proceeds from notes payable
Repayments of notes payable
Proceeds from issuance of long-term debt
Repayment of long-term debt
Cash dividends paid
Payments for the repurchase of common stock
Payments for the issuance of equity instruments, net
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures of cash flow information:
Noncash transactions:
Common shares issued in connection with acquisitions
4,178
(87,989)
38,400
3,588
32,561
(1,243)
(1,166)
765
(1,644)
61,953
—
—
—
(4,286)
(19,795)
(15,347)
78
22,603
4,032
(104,223)
61,500
(1,063)
52,985
(36,015)
(2,634)
1,271
(37,378)
—
1,000
(3,000)
40,000
(5,714)
(16,569)
(15,526)
(212)
(21)
53,520
21,955
75,475 $
15,586
6,369
21,955 $
3,452
(94,898)
31,200
(953)
28,018
—
(2,729)
1,911
(818)
—
2,000
—
—
—
(10,845)
(19,387)
(2,576)
(30,808)
(3,608)
9,977
6,369
167,035 $
171,885 $
—
$
$
117
NOTE 21 - QUARTERLY CONDENSED FINANCIAL INFORMATION (Unaudited)
The following table presents unaudited quarterly financial information for the periods indicated:
($ in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
($ in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
4th
Quarter
3rd
Quarter
2nd
Quarter
1st
Quarter
2020
84,113 $
6,667
77,446
9,463
67,983
18,506
51,050
35,439
6,508
28,931 $
1.00 $
1.00
70,787 $
7,433
63,354
14,080
49,274
12,629
39,524
22,379
4,428
17,951 $
0.68 $
0.68
2019
73,191 $
7,358
65,833
19,591
46,242
9,960
37,912
18,290
3,656
14,634 $
0.56 $
0.56
76,688
13,320
63,368
22,264
41,104
13,408
38,673
15,839
2,971
12,868
0.49
0.48
4th
Quarter
3rd
Quarter
2nd
Quarter
1st
Quarter
77,238 $
15,625
61,613
1,341
60,272
14,418
38,354
36,336
7,246
29,090 $
81,078 $
18,032
63,046
1,833
61,213
13,564
38,239
36,538
7,469
29,069 $
79,201 $
17,486
61,715
1,722
59,993
11,964
49,054
22,903
4,479
18,424 $
1.10 $
1.09
1.09 $
1.08
0.69 $
0.68
67,617
15,274
52,343
1,476
50,867
9,230
39,838
20,259
4,103
16,156
0.68
0.67
$
$
$
$
$
$
118
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the Company’s disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, the “Act”) as of
December 31, 2020. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of
December 31, 2020, such disclosure controls and procedures were effective to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Act is accumulated and communicated to the Company’s management (including the
Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Assessment of Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) and 15(d)-15(f) under the Act). The Company’s internal control system is a process designed to provide reasonable assurance
to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
As permitted, management excluded from its assessment the operations of Seacoast Commerce Banc Holdings, which was acquired on
November 12, 2020. As described in Note 2 to the Consolidated Financial Statements, assets acquired and excluded from management's
assessment of internal control over financial reporting comprised approximately 13% and 11% of consolidated total and net assets,
respectively, at December 31, 2020. Operations of Seacoast Commerce Banc Holdings comprised approximately 3% of revenues, for the year
ended December 31, 2020.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are
recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United
States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors
of the Company; and provide reasonable assurance regarding prevention or untimely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the Company’s financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial reporting. Further, because of changes in conditions, the effectiveness of any
system of internal control may vary over time. The design of any internal control system also factors in resource constraints and consideration
for the benefit of the control relative to the cost of implementing the control. Because of these inherent limitations in any system of internal
control, management cannot provide absolute assurance that all control issues and instances of fraud within the Company have been detected.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this
assessment, management used the criteria set forth by the Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Management has concluded that the Company maintained an effective system of
internal control over financial reporting based on these criteria as of December 31, 2020.
119
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, who audited the consolidated financial statements,
has issued an audit report on the Company’s internal control over financial reporting as of December 31, 2020, and it is included herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the
Act) that occurred during the Company’s quarter ended December 31, 2020 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
None.
ITEM 9B: OTHER INFORMATION
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the Board and Committee Information and Executive Officer
sections of the Company’s Proxy Statement for its 2021 Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.
Governance:
The Company has adopted a Code of Ethics applicable to all of its directors and employees, including the principal executive officer,
principal financial officer and principal accounting officer. A copy of the Code of Ethics is available on the Company’s website at
www.enterprisebank.com.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Executive Compensation section of the Company’s Proxy
Statement for its 2021 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.
120
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table provides information regarding the securities authorized for issuance under our equity compensation plans as of
December 31, 2020. Additional information regarding these plans is included in “Item 8. Note 16 – Shareholders’ Equity and Compensation
Plans” in this report.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(a)
Includes the following:
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights (a)
Weighted-average exercise
price of outstanding
options, warrants and rights
(b)
Number of securities
remaining available for
future issuance under equity
compensation plans (c)
289,090
—
289,090
NA
—
NA
1,055,711
—
1,055,711
•
•
•
151,855 shares of common stock to be issued upon vesting of outstanding restricted stock units under the 2018 Stock Incentive Plan;
125,176 shares of common stock to be issued upon vesting of outstanding performance units under the 2018 Stock Incentive Plan; and
12,059 shares of common stock to be issued upon deferral release of common stock under the 2018 Stock Incentive Plan and the Non-Management
Director Stock Plan.
(c)
Includes the following:
•
•
•
339,691 shares of common stock available for issuance under the 2018 Stock Incentive Plan;
80,130 shares of common stock available for issuance under the Non-Management Director Stock Plan; and
635,890 shares of common stock available for issuance under the 2018 Employee Stock Purchase Plan.
Additional information required by this item is incorporated herein by reference to the Information Regarding Beneficial Ownership section
of the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the Related Person Transactions section of the Company’s Proxy
Statement for its 2021 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to the Fees Paid to Independent Registered Public Accounting Firm section
of the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
121
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The consolidated financial statements of Enterprise Financial Services Corp and its subsidiaries and independent auditors’ reports are
included in Part II, Item 8, of this Form 10-K.
2. Financial Statement Schedules
All financial statement schedules have been omitted, as they are either inapplicable or included in the Notes to Consolidated Financial
Statements.
3. Exhibits
No. Description
2.1 Agreement and Plan of Merger, among Enterprise Financial Services Corp, Enterprise Bank & Trust, Trinity Capital Corporation and Los Alamos
National Bank, dated November 1, 2018 (incorporated herein by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K
filed on November 2, 2018 (File No. 001-15373)).
2.2 Agreement and Plan of Merger, dated August 20, 2020 by and among Enterprise Financial Services Corp, Enterprise Bank & Trust, Seacoast
Commerce Banc Holdings and Seacoast Commerce Bank (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report
on Form 8-K filed with the SEC on August 21, 2020 (File No. 001-15373)).
3.1 Certificate of Incorporation of Registrant, (incorporated herein by reference to Exhibit 3.1 of Registrant's Registration Statement on Form S-1 filed
on December 16, 1996 (File No. 333-14737)).
3.2 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 4.2 to Registrant's Registration Statement
on Form S-8 filed on July 1, 1999 (File No. 333-82087)).
3.3 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to Registrant's Quarterly Report on
Form 10-Q for the period ending September 30, 1999 (File No. 001-15373)).
3.4 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 99.2 to Registrant's Current Report on
Form 8-K filed on April 30, 2002 (File No. 001-15373)).
3.5 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Appendix A to Registrant's Proxy Statement on
Form 14-A filed on November 20, 2008 (File No. 001-15373)).
3.6 Certificate of Designations of Registrant for Fixed Rate Cumulative Perpetual Preferred Stock, Series A, dated December 17, 2008 (incorporated
herein by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K filed on December 23, 2008 (File No. 001-15373)).
3.7 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q for the period ending June 30, 2014 (File No. 001-15373)).
122
3.8 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.8 to Registrant’s Quarterly Report on
Form 10-Q filed on July 26, 2019 (File No. 001-15373)).
3.9 Amended and Restated Bylaws of Registrant (incorporated herein by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K filed on
June 12, 2015 (File No. 001-15373)).
4.1 Description of Registrant’s Securities (incorporated herein by reference to Exhibit 4.1 to Registrant's Annual Report on Form 10-K filed on February
22, 2020 (File No. 001-15373)).
4.2 Long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish copies of such
instruments to the Securities and Exchange Commission upon request.
10.1.1* Executive Employment Agreement by and between Enterprise Financial Services Corp and James B. Lally, dated May 2, 2017 (incorporated by
reference to Exhibit 10.1.1 to the Current Report on Form 8-K of Registrant, filed with the Commission on June 6, 2017 (File No. 001-
15373)).
10.1.2* Executive Employment Agreement dated September 13, 2013 by and between Enterprise Financial Services Corp and Keene S. Turner
(incorporated by reference herein to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the period ending September 30,
2013 (File No. 001-15373)), amended by that First Amendment of Executive Employment Agreement dated as of February 27, 2015
(incorporated herein by reference to Exhibit 10.1.7 to the Registrant’s Annual Report on Form 10-K filed on February 27, 2015 (File
No. 001-15373)), and amended by that Second Amendment to Executive Employment Agreement dated as of October 29, 2015
(incorporated by reference to Exhibit 10.1.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ending September 30,
2015 (File No. 001-15373)).
10.1.3* Restricted Stock Unit Agreement dated as of December 7, 2018 by and between Registrant and Keene S. Turner (incorporated herein by
reference to Exhibit 10.1.15 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-15373)).
10.1.4* Executive Employment Agreement dated effective January 1, 2005 by and between Enterprise Financial Services Corp and Scott R. Goodman,
amended by that First Amendment of Executive Employment Agreement dated as of December 31, 2008 (incorporated herein by
reference to Exhibit 10.1.5 to Registrant’s Annual Report on Form 10-K filed on March 15, 2013 (File 001-15373)), and amended by
that Second Amendment of Executive Employment Agreement dated October 11, 2013 (incorporated herein by reference to Exhibit
10.1.5 to Registrant’s Annual Report on Form 10-K filed on March 17, 2014 (File 001-15373)).
10.1.5* Amended and Restated Executive Employment Agreement dated as of October 24, 2019 by and between Enterprise Financial Services Corp and
Douglas N. Bauche (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of the Registrant, filed with
the Commission on October 25, 2019 (File No. 001-15373)).
10.1.6* Executive Employment Agreement dated as of October 24, 2019 by and between Enterprise Financial Services Corp and Nicole M. Iannacone
(incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of the Registrant, filed with the Commission on
October 25, 2019 (File No. 001-15373)).
10.1.7* Executive Employment Agreement dated as of October 24, 2019 by and between Enterprise Financial Services Corp and Mark G. Ponder
(incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of the Registrant, filed with the Commission on
October 25, 2019 (File No. 001-15373)).
10.1.8* Enterprise Financial Services Corp Amended and Restated Deferred Compensation Plan I dated effective as of December 31, 2008
(incorporated by reference to Exhibit 10.9 to Registrant's Report on Form 10-K for the year ended December 31, 2008 (File No. 001-
15373)).
123
10.1.9* Enterprise Financial Services Corp, Stock Plan for Non-Management Directors (incorporated herein by reference to Registrant’s Proxy
Statement on Schedule 14-A filed on March 7, 2006, as amended on Schedule 14A filed on April 23, 2012 (File No. 001-15373), and as
amended on Schedule 14A filed on April 17, 2019 (File No. 001-15373)).
10.1.10* Enterprise Financial Services Corp, Annual Incentive Plan (incorporated herein by reference to Appendix C to Registrant's Proxy Statement on
Schedule 14A, filed on March 7, 2006 and as amended on Schedule 14A filed on April 23, 2012 (File No. 001-15373)).
10.1.11* Enterprise Financial Services Corp. Amended and Restated 2018 Stock Incentive Plan (incorporated herein by reference to Appendix A to
Registrant’s Proxy Statement on Schedule 14A, filed on March 14, 2018 (File No. 001-15373)).
10.1.12* Enterprise Financial Services Corp. 2018 Employee Stock Purchase Plan (incorporated herein by reference to Appendix B to Registrant’s
Proxy Statement on Schedule 14A, filed on March 14, 2018 (File No. 001-15373)).
10.1.13* Form of Enterprise Financial Services Corp LTIP Grant Agreement, pursuant to Amended and Restated 2018 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2018
(File No. 001-15373)).
10.1.14+ Form of Enterprise Financial Services Corp Stock Option Award Agreement, pursuant to Amended and Restated 2018 Stock Incentive Plan
(filed herewith).
10.2 Form of Voting Agreements, dated November 1, 2018, between Enterprise Financial Services Corp and shareholders of Trinity Capital Corporation
(incorporated herein by reference to Exhibit A to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on November 2, 2018
(File No. 001-15373)).
10.3 Loan Agreement dated February 24, 2016 between US Bank National Association and Registrant (incorporated herein by reference to Exhibit 10.2
to the Registrant’s Report on Form 10-K for the year ended December 31, 2015 (File No. 001-15373)), amended by the First
Amendment to Loan Agreement dated as of February 23, 2017 (incorporated herein by reference to Exhibit 10.2 to Registrant’s Report
on Form 10-K for the year ended December 31, 2016 (File No. 001-15373)), amended by the Second Amendment to Loan agreement
dated as of February 23, 2018 (incorporated herein by reference to Exhibit 10.2 to Registrant’s Report on Form 10-K for the year ended
December 31, 2017 (File No. 001-15373)),amended by the Third Amendment to Loan agreement dated as of February 22, 2019
(incorporated herein by reference to Exhibit 10.3 to the Registrant’s Report on Form 10-K for the year ended December 31, 2018 (File
No. 001-15373)), and amended by the Fourth Amendment to Loan agreement dated as of February 22, 2020, (incorporated herein by
reference to Exhibit 10.3 to Registrant's Annual Report on Form 10-K filed on February 22, 2020 (File No. 001-15373)).
21.1+ Subsidiaries of Registrant.
23.1+ Consent of Deloitte & Touche LLP.
24.1+ Power of Attorney.
31.1+ Chief Executive Officer’s Certification required by Rule 13(a)-14(a).
31.2+ Chief Financial Officer’s Certification required by Rule 13(a)-14(a).
32.1+ Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.
32.2+ Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.
124
101+ Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Annual Report on Form 10-K for the period
ended December 31, 2020, is formatted in Inline XBRL interactive data files: (i) Consolidated Balance Sheet at December 31,
2020 and December 31, 2019; (ii) Consolidated Statement of Income for the years ended December 31, 2020, 2019, and 2018; (iii)
Consolidated Statement of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018; (iv) Consolidated
Statement of Changes in Equity for the years ended December 31, 2020, 2019, and 2018; (v) Consolidated Statement of Cash Flows for
the years ended December 31, 2020, 2019, and 2018; and (vi) Notes to Financial Statements.
104+ The cover page of Enterprise Financial Services Corp’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline
XBRL (contained in Exhibit 101).
* Management contract or compensatory plan or arrangement.
+ Filed herewith
Note: In accordance with Item 601(b)(4)(iii) of Regulation S-K, Registrant hereby agrees to furnish to the SEC, upon its request, a copy of any
instrument that defines the rights of holders of each issue of long-term debt of Registrant and its consolidated subsidiaries for which consolidated
and unconsolidated financial statements are required to be filed and that authorizes a total amount of securities not in excess of ten percent of the
total assets of the Registrant on a consolidated basis.
(b) The exhibits not incorporated by reference herein are filed herewith.
(c) The financial statement schedules are either included in the Notes to Consolidated Financial Statements or omitted if inapplicable.
None.
ITEM 16: FORM 10-K SUMMARY
125
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 19, 2021.
SIGNATURES
ENTERPRISE FINANCIAL SERVICES CORP
/s/ James B. Lally
James B. Lally
Chief Executive Officer and Director
126
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on February 19, 2021.
Signatures
/s/ James B. Lally
James B. Lally
/s/ Keene S. Turner
Keene S. Turner
/s/ Troy R. Dumlao
Troy R. Dumlao
/s/ John S. Eulich*
John S. Eulich
/s/ Michael A. DeCola*
Michael A. DeCola
/s/ James F. Deutsch*
James F. Deutsch
/s/ Robert E. Guest, Jr.*
Robert E. Guest, Jr.
/s/ James M. Havel*
James M. Havel
/s/ Judith S. Heeter*
Judith S. Heeter
/s/ Michael R. Holmes*
Michael R. Holmes
/s/ Nevada A. Kent, IV*
Nevada A. Kent, IV
/s/ Richard M. Sanborn*
Richard M. Sanborn
/s/ Anthony R. Scavuzzo*
Anthony R. Scavuzzo
/s/ Eloise E. Schmitz*
Eloise E. Schmitz
/s/ Sandra A. Van Trease*
Sandra A. Van Trease
*By: /s/ Keene S. Turner
Keene S. Turner
Attorney-In-Fact
February 19, 2021
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer (Principal Financial
Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
127
EXHIBIT 10.1.14
ENTERPRISE FINANCIAL SERVICES CORP
AMENDED AND RESTATED 2018 STOCK INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AWARD
Enterprise Financial Services Corp (the “Company”) has granted you a Nonqualified Stock Option (the “Option”) under the
Enterprise Financial Services Corp Amended and Restated 2018 Stock Incentive Plan (the “Plan”). The terms of the grant are set
forth in the Nonqualified Stock Option Award Agreement provided to you (the “Agreement”). The following provides a summary of
the key terms of the Option; however, you should read the entire Agreement, along with the terms of the Plan, to fully understand the
grant.
SUMMARY OF NONQUALIFIED STOCK OPTION AWARD
Participant:
Date of Grant:
Vesting Schedule:
Exercise Price Per Share:
Total Number of Options Granted:
Term/Expiration Date:
[ ]
[ ]
[ ]
$[ ]
[ ]
[ ]
The above is a summary description of certain provisions of the Agreement and is not intended to be complete. In the event any
aspect of this summary conflicts with the terms of the Agreement, the terms of the Agreement shall govern.
ENTERPRISE FINANCIAL SERVICES CORP
AMENDED AND RESTATED 2018 STOCK INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AWARD AGREEMENT
This NONQUALIFIED STOCK OPTION AWARD AGREEMENT (the “Agreement”), dated as of [_____] (the “Date of
Grant”), is delivered by Enterprise Financial Services Corp (the “Company”) to [______] (the “Participant”).
RECITALS
A. The Enterprise Financial Services Corp Amended and Restated 2018 Stock Incentive Plan (the “Plan”) provides for the
grant of options to purchase shares of common stock of the Company. The Company has decided to make a stock option award as an
inducement for the Participant to promote the best interests of the Company and its stockholders.
B. This Agreement and the grant of Option are made under, and are subject to, all of the terms and provisions of the Plan, as
amended from time to time, which terms are incorporated herein by reference. Notwithstanding anything herein, the Plan to the
contrary, the Option is subject to the Company’s Clawback Policy as amended from time to time. The Compensation Committee of
the Board (the “Committee”) has been authorized by the Board of Directors of the Company (the “Board”) to make any and all
determinations necessary to administer the Option. Capitalized terms that are used but not defined herein shall have the respective
meanings accorded to such terms in the Plan.
NOW, THEREFORE, the parties to this Agreement, intending to be legally bound hereby, agree as follows:
1. Grant of Option. Subject to the terms and conditions set forth in this Agreement and in the Plan, the Company hereby grants
to the Participant a Nonqualified Stock Option (the “Option”) to purchase [____] shares of common stock of the Company
(“Shares”) at an exercise price of $[____] per Share.
2. Vesting. The Option shall become vested and exercisable, according to the following vesting schedule, if the Participant
continues to be employed by, or provide service to, the Company from the Date of Grant until the applicable vesting date:
Vesting Date
[ ]
[ ]
[ ]
% of Option Vested
[33% ]
[33% ]
[All remaining shares ]
The vesting of the Option shall be cumulative, but shall not exceed 100% of the shares subject to the Option granted above. If the
foregoing schedule would produce fractional shares, the portion of the Option that vests shall be rounded down to the nearest whole
share.
3. Term of Option.
(a) The Option shall have a term of ten (10) years from the Date of Grant and shall terminate at the expiration of that period,
unless it is terminated at an earlier date pursuant to the provisions of this Agreement or the Plan.
(b) Unless a later termination date is provided for in a Company-sponsored plan, policy or arrangement, or any agreement to
which the Company is a party, the Option shall automatically terminate upon the happening of the first of the following events:
(i) The expiration of the ninety (90) day period after the Participant ceases to be employed by, or provide service to,
the Company, if the termination is for any reason other than death, Total and Permanent Disability, or Cause.
(ii) The expiration of the one (1) year period after the Participant ceases to be employed by, or provide service to, the
Company on account of the Participant’s death or Total and Permanent Disability.
(iii) The date on which the Participant ceases to be employed by, or provide services to, the Company on account of a
termination by the Company for Cause. In addition, notwithstanding the prior provisions of this Paragraph 3, if the Company
determines that the Participant has engaged in conduct that constitutes Cause at any time while the Participant is employed by, or
providing services to, the Company or after the Participant’s termination of employment or services, the Option shall terminate as of
the date on which such Cause first occurred.
Notwithstanding the foregoing, in no event may the Option be exercised after the date that is immediately before the tenth
anniversary of the Date of Grant. Any portion of the Option that is not vested and exercisable at the time the Participant ceases to be
employed by, or provide service to, the Company shall immediately terminate.
(c) For the purposes of this Agreement, “Cause” shall mean any event which constitutes Cause as defined in the employment
agreement, offer letter or other arrangement between the Company and the Participant, or, if no such definition exists, the occurrence
of any of the following: (i) the willful and continued failure by the Participant to substantially perform his or her duties and
obligations to the Company (other than any such failure resulting from any physical or mental condition, whether or not such
condition constitutes a Disability), or (ii) the willful engaging by the Participant in misconduct that is materially injurious to the
Company, monetarily or otherwise.
4. Exercise Procedures
(a) Subject to the provisions of Paragraphs 2 and 3 above, the Participant may exercise part or all of the Option by giving the
Company written notice of intent to exercise in the manner provided in this Agreement, specifying the number of Shares as to which
the Option is to be exercised. On the delivery date, the Participant shall pay the exercise price (i) in cash, (ii) with the approval of the
Committee, by delivering Shares of the Company which shall be valued at their fair market value on the date of delivery, (iii)
payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board, or (iv) by such
other method as the Committee may approve. The Committee may impose from time to time such limitations as it deems appropriate
on the use of Shares of the Company to exercise the Option.
(b) The obligation of the Company to deliver Shares upon exercise of the Option shall be subject to all applicable laws, rules,
and regulations and such approvals by governmental agencies as may be deemed appropriate by the Company, including such
actions as Company counsel shall deem necessary or appropriate to comply with relevant securities laws and regulations.
(c) The Company may require that the Participant (or other person exercising the Option after the Participant’s death)
represent that the Participant is purchasing Shares for the Participant’s own account and not with a view to or for sale in connection
with any distribution of the Shares, or such other representation as the Committee deems appropriate.
(d) All obligations of the Company under this Agreement shall be subject to the rights of the Company as set forth in the Plan
to withhold amounts required to be withheld for any taxes, if applicable. Subject to Committee approval, the Participant may elect to
satisfy any tax withholding obligation of the Company with respect to the Option by having Shares withheld up to an amount that
does not exceed the minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities.
5. Termination of Employment.
(a) Generally, except as set forth in subsections (b), (c), (d), (e), and (f) below, if the Participant’s employment with the
Company terminates for any reason, the unvested portion of the Option shall be cancelled immediately and the Participant shall
immediately forfeit without any consideration any rights to the Shares subject to such unvested portion.
(b) Retirement. In the event of the Participant’s Retirement (as hereinafter defined), the Option shall vest immediately on the
date of the Participant’s Retirement. For purposes of this Agreement, “Retirement” means the Participant’s termination of
employment with the Company, other than for reasons that constitute deliberate gross misconduct, determined in the sole discretion
of the Committee, after the time that the Participant has attained 65 years of age and the sum of the Participant’s age and continuous
full years of full time employment service with the Company is 70 (e.g., having attained the age of 65 with 5 years of employment
with the Company would qualify the Participant for Retirement). For these purposes, the Participant will be deemed to have a year of
full time employment service with the Company if the Participant
would be entitled to receive credit for a year of service under a qualified pension plan in accordance with Internal Revenue Code §
1053(b)(2)(c).
(c) Early Retirement. In the event of the Participant’s Early Retirement (as hereinafter defined), the Option shall vest
immediately on the date of the Participant’s Early Retirement. For purposes of this Agreement, “Early Retirement” means the
Participant’s termination of employment with the Company, other than for reasons that constitute deliberate gross misconduct,
determined in the sole discretion of the Committee, after the time that the Participant has attained 60 years of age and the sum of the
Participant’s attained age and continuous full years of full time employment service with the Company is 70 (e.g., having attained
the age of 60 with 10 years of employment with the Company would qualify the Participant for Early Retirement). For these
purposes, the Participant will be deemed to have a year of full time employment service with the Company if the Participant would
be entitled to receive credit for a year of service under a qualified pension plan in accordance with Internal Revenue Code §1053(b)
(2)(c).
(d) Death, Disability. Notwithstanding the foregoing, in the event the Participant’s employment with the Company terminates
due to the death or Disability of the Participant, the Option shall vest on the date of the Participant’s death or termination due to
Disability. For purposes of this Agreement, “Disability” shall mean the Participant’s qualification for disability benefits under the
Social Security disability insurance program, or if the Participant is determined to be permanently disabled by the Committee in its
discretion.
(e) Termination without Cause. If the Company terminates the Participant’s employment without Cause outside the Change
of Control Period (as defined below), then the Option shall expire on the earlier of the last day of the term of the Option and the date
that is ninety (90) days after the date of such termination; provided, however, that if the Participant’s employment is terminated and
the Participant is subsequently rehired within 90 days following such termination and prior to the expiration of the Option, the
Participant shall not be considered to have undergone a termination of employment. In the event of a termination described in this
subsection (c), the Option shall remain exercisable by the Participant until its expiration only to the extent that the Option was
exercisable at the time of such termination.
(f) Change of Control. Notwithstanding the foregoing, in the event the Participant’s employment with the Company is
terminated by the Company without Cause during the period beginning three (3) months prior to and ending twelve (12) months
following a Change of Control (the “Change of Control Period”), the Option shall immediately vest on the date of the Participant’s
termination of employment.
6. Restrictions on Exercise. Except as the Company may otherwise permit pursuant to the Plan, only the Participant may
exercise the Option during the Participant’s lifetime and, after the Participant’s death, the Option shall be exercisable (subject
to the limitations specified in the Plan) solely by the legal representatives of the Participant, or by the person who acquires
the right to exercise the Option by will or by the laws of descent and distribution, to the extent that the Option is vested and
exercisable pursuant to this Agreement.
7. Adjustments. Appropriate adjustments in the number of Shares shall be made by the Committee to give effect to adjustments
made in the number or type of shares of common stock through a reclassification, stock dividend, stock split or stock
combination, or similar event in accordance with the terms of the Plan.
8. Grant Subject to Plan Provisions. This grant is made pursuant to the Plan, the terms of which are incorporated herein by
reference, and in all respects shall be interpreted in accordance with the Plan. The grant and exercise of the Option are subject
to interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in
accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to (i) rights and obligations
with respect to withholding taxes, (ii) the registration, qualification or listing of the Shares, (iii) changes in capitalization of
the Company and (iv) other requirements of applicable law. The Committee shall have the authority to interpret and construe
the Option pursuant to the terms of the Plan, and its decisions shall be conclusive as to any questions arising hereunder.
9. No Employment or Other Rights. The grant of the Option shall not confer upon the Participant any right to be retained by
or in the employ or service of the Company and shall not interfere in any way with the right of the Company to terminate the
Participant’s employment or service at any time. The right of the Company to terminate at will the Participant’s employment
or service at any time for any reason is specifically reserved.
10.No Shareholder Rights. Neither the Participant, nor any person entitled to exercise the Participant’s rights in the event of the
Participant’s death, shall have any of the rights and privileges of a shareholder with respect to the Shares subject to the
Option, until certificates for Shares have been issued upon the exercise of the Option.
11.Compliance with Section 409A of the Code. It is intended that this Agreement shall be administered in a manner that will
comply with or meet an exception from Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and
this Agreement shall be administered and interpreted in accordance with such intent. The Committee may adopt rules deemed
necessary or appropriate to qualify for an exception from or to comply with the requirements of Section 409A of the Code.
Notwithstanding anything in this Section 13 to the contrary, no amendment to or payment under this Agreement will be made
unless permitted under Section 409A of the Code.
12.Delivery Subject to Legal Requirements. The obligation of the Company to deliver Shares pursuant to the exercise of the
Option shall be subject to the condition that if at any time the Board shall determine in its discretion that the listing,
registration or qualification of the shares upon any securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issue of
shares, the shares may not be issued in whole or in part unless such listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not acceptable to the Board. The issuance of Shares to the
Participant pursuant to the exercise of the Option is subject
to any applicable taxes and other laws or regulations of the United States, or of any state having jurisdiction thereof.
13.Assignment and Transfers. Except as the Committee may otherwise permit pursuant to the Plan, the rights and interests of
the Participant under this Agreement may not be sold, assigned, encumbered or otherwise transferred except, in the event of
the death of the Participant, by will or by the laws of descent and distribution. In the event of any attempt by the Participant
to alienate, assign, pledge, hypothecate, or otherwise dispose of the Option or any right hereunder, except as provided for in
this Agreement, or in the event of the levy or any attachment, execution or similar process upon the rights or interests hereby
conferred, the Company may terminate the Option by notice to the Participant, and the Option and all rights hereunder shall
thereupon become null and void. The rights and protections of the Company hereunder shall extend to any successors or
assigns of the Company and to the Company’s parents, subsidiaries, and affiliates. This Agreement may be assigned by the
Company without the Participant’s consent.
14.Applicable Law. The validity, construction, interpretation and effect of this Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.
15.Notice. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of the
Committee, and any notice to the Participant shall be addressed to such Participant at the current address shown on the
payroll of the Company, or to such other address as the Participant may designate to the Company in writing. Any notice
shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, deposited,
postage prepaid, in a post office regularly maintained by the United States Postal Service.
16.Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original
copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.
Facsimile or other electronic transmission of any signed original document or retransmission of any signed facsimile or other
electronic transmission will be deemed the same as delivery of an original.
17.Complete Agreement. Except as otherwise provided for herein, this Agreement and those agreements and documents
expressly referred to herein embody the complete agreement and understanding among the parties and supersede and preempt
any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to
the subject matter hereof in any way. The terms of this Agreement shall be binding upon the executors, administrators, heirs,
successors and assigns of the Participant.
18.Committee Authority. By entering into this Agreement the Participant agrees and acknowledges that all decisions and
determinations of the Committee shall be final and binding on the Participant, his or her beneficiaries and any other person
having or claiming an interest in the Award.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Agreement, and the
Participant has executed this Agreement, effective as of the date first set forth above.
Enterprise Financial Services Corp
By:
Name:
Title:
I hereby accept the Option described in this Agreement, and I agree to be bound by the terms of the Plan and this Agreement. I
hereby further agree that all the decisions and determinations of the Committee shall be final and binding.
Participant:
Date:
SUBSIDIARIES OF THE REGISTRANT
Company
Enterprise Bank & Trust
Enterprise Real Estate Mortgage Company, LLC
Enterprise IHC, LLC
Enterprise Portfolio Holdings, Inc.
EXHIBIT 21.1
State of Organization
Missouri
Missouri
Missouri
Nevada
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-136230, 333-148328, 333-152985, 333-183177, 333-
192497, 333-215345, 333-226407, and 333-192497 on Form S-8, and 333-237612 on Form S-3 of our report dated February 19, 2021
relating to the consolidated financial statements of Enterprise Financial Services Corp and subsidiaries (the “Company”), and the
effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K for the year ended
December 31, 2020.
EXHIBIT 23.1
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 19, 2021
POWER OF ATTORNEY
EXHIBIT 24.1
The undersigned members of the Board of Directors and Executive Officers of Enterprise Financial Services Corp, a Delaware corporation
(the "Company") hereby appoint Keene S. Turner or James Lally as their Attorney-in-Fact for the purpose of signing the Company's
Securities Exchange Commission Form 10-K (and any amendments thereto) for the year ended December 31, 2020.
Signature
Title
Date
/s/ John S. Eulich
John S. Eulich
/s/ Michael A. DeCola
Michael A. DeCola
/s/ James F. Deutsch
James F. Deutsch
/s/ Robert E. Guest, Jr.
Robert E. Guest, Jr.
/s/ James M. Havel
James M. Havel
/s/ Judith S. Heeter
Judith S. Heeter
/s/ Michael R. Holmes
Michael R. Holmes
/s/ Nevada A. Kent, IV
Nevada A. Kent, IV
/s/ Richard M. Sanborn
Richard M. Sanborn
/s/ Anthony R. Scavuzzo
Anthony R. Scavuzzo
/s/ Eloise E. Schmitz
Eloise E. Schmitz
/s/ Sandra A. Van Trease
Sandra A. Van Trease
Chairman of the Board of Directors
February 19, 2021
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James B. Lally, certify that:
1.
I have reviewed this annual report on Form 10-K of Enterprise Financial Services Corp;
EXHIBIT 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
/s/ James B. Lally
By:
James B. Lally
Chief Executive Officer
Date: February 19, 2021
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Keene S. Turner, certify that:
1.
I have reviewed this annual report on Form 10-K of Enterprise Financial Services Corp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have; and
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
/s/ Keene S. Turner
By:
Keene S. Turner
Chief Financial Officer
Date: February 19, 2021
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Enterprise Financial Services Corp (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with
the Securities and Exchange Commission (the “Report”), I, James B. Lally, Chief Executive Officer of the Company, certify to the best of my knowledge and
belief, pursuant to 18 U.S.C. § 1350, as enacted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ James B. Lally
James B. Lally
Chief Executive Officer
February 19, 2021
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of Enterprise Financial Services Corp (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with
the Securities and Exchange Commission (the “Report”), I, Keene S. Turner, Chief Financial Officer of the Company, certify to the best of my knowledge and
belief, pursuant to 18 U.S.C. § 1350, as enacted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Keene S. Turner
Keene S. Turner
Chief Financial Officer
February 19, 2021